Introduction to Disability Insurance

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Disability Insurance Protects your most valuable asset and your ability to earn an income.

When you get sick or injured and are unable to work, you don’t want to worry about how you’ll pay the bills or wonder where the money for next week’s groceries will come from. Disability Insurance can help replace a portion of your paycheck — you can think of it as income protection.
Disability Insurance might make sense for you if:
  • You don’t have a large amount of savings or other sources of income available.
  • You depend on your income to support your lifestyle.
  • You can’t afford to be out of work for weeks or months at a time.
Disability insurance pays cash benefits to the policyholder in the event the insured is unable to work due to sickness or injury. That cash benefit ranges from 50% to 70% of income. The insurance company will not pay more than 70% of income because there must be an incentive to return to work.
If you pay the premium the benefits are normally received free from income tax, if the premiums are paid by an employer, the benefits are taxable as ordinary income.

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    A disability policy is composed of various elements:

    Other Benefits that can be added to an individual disability policy

    Protection Against Inflation

    A benefit that can be added that offers a cost-of-living adjustment for inflation during a long-term claim.

    Automatic Increase Rider

    Automatically increases monthly benefits for a specified period of time. A typical increase is 5% compound.

    Future Increase Options

    Allows the insured to purchase additional benefit amounts without proof of insurability.

    Capital Sum Benefit

    Pays the insured a lump sum benefit up to 12 times the monthly benefit if the insured loses the sight of one eye with no possibility of recovery or has a hand or foot severed. This benefit is paid in addition to the other benefits.

    Rehabilitation Benefit

    To help a disabled insured return to work, this benefit will pay some of the expenses incurred when the insured enrolls in an approved rehabilitation center. This benefit is paid in addition to the other benefits.

    Transplant & Cosmetic Surgery Benefit

    Under this benefit, any disability arising from donating a transplant organ, improving your appearance or correcting a disfigurement will be covered by the policy.

    Types of Coverage

    • Social Security

      Social Security does not just provide for retirement income but disability income as well.

      • In 2014, the average monthly payment to a disabled worker with a spouse and children was $1796. See SSI Fact Sheet
      • Eligibility is based on being unable to perform any gainful employment.See SSDI Disability Planner
      • You are eligible for benefits after you have been disabled for 5 months and if the disability is expected to last 12 months. See Waiting Period Question
      • Social Security disability payments are subject to federal income tax if your income exceeds $25,000 individually or $32,000 jointly. See Tax Question

    • Workers Compensation

      Most employers are required to provide this coverage. The amount and duration varies by state. Workers Compensation only pays if the disability occurs on the job, and usually lasts for only a few years and the payments are low.

    • Individual Policies

      For individual policies, the applicant needs to qualify and go through an underwriting process, similar to the process required for life insurance. The applicant could be subject to a higher premium or even be declined based on his or her occupation, medical history, or lifestyle. Individual policies are usually purchased by high income professionals because of the cost.

    • Group Policies

      Some states require employers to carry group disability insurance anywhere from 26 to 52 weeks.

    • Group Long Term Disability (LTD)

      Group LTD is carried by almost half of mid-size to large employers and provides long term benefits for at least 5 years covering about 60% of salary. The premium is usually very low, does not require proof of insurability, and often is fully paid by the employer.

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