Disability (Income Replacement) Insurance at a Glance
Disability insurance, more appropriately called income replacement insurance, provides a monthly benefit payment to individuals when he or she is unable to perform the duties of his or her regular occupation due to an injury or illness and is not working elsewhere*.
*assumes non-cancellable individual disability policy with regular occupation coverage.
Definitions may be different on group plans and guaranteed renewable or conditionally renewable plans.
Why You Need Disability Insurance
Most people recognize the need for home, automobile and even life insurance. But most don't recognize that their ability to work is their most valuable asset. The fact is that disability strikes working people far more often than premature death. A disability can interrupt their cash flow, causing financial hardship. Government benefits likely won't pay enough, savings won’t last long, borrowing is likely not an option and liquidating assets should be a last resort.
How do Disability Insurance Policies work?
- Monthly benefit purchased is based on your net income (what you pay taxes on)
- Premiums are calculated based on occupation class (what you do), with lower risk occupations offered lower premiums
- Benefit is paid after stated elimination or waiting period, based on meeting the definition of disability in the contract
- Waiting period can be 30, 60, 90, 120, 180, 365 or 730 days
- Benefit period can be 2 years, 5 years, 10 years or to age 65
- Benefit amount is usually less than the individual’s working income, to provide an incentive to return to work
- Definition of disability can be own occupation, regular occupation or any occupation
- Regular occupation for 2 years, 5 years or to age 65
- Some plans include partial or residual coverage
- Waiver of premium is included
- Benefits are received tax-free if premiums are paid with after-tax dollars