What do I Need to Know about Disability Insurance???

I have been getting more and more questions lately about disability insurance (DI), so I thought I would put this post together to help you understand the most general things that you will need to before purchasing a disability policy.

1. There are 2 main types of disability policies. These policies are classified as occupational disability (own occupation) and non-occupational disability (any occupation). An occupational  DI policy pays out an income stream if you can not perform the duties of YOUR occupation. These policies are much more comprehensive, they require more underwriting and the premiums are higher. Non-occupational disability coverage states that you must not be able to perform the duties of ANY occupation before it will pay out an income stream. (These two types of policies are also known as total disability (non-occupational) vs partial disability (occupational) coverage.) A non-occupational disability policy is usually less premium and easier to apply for. Many non-occupational disability policies are also accident only, meaning that if you need to miss work due to a disease or sickness that it is not covered. Check with your writing agent to make sure of the coverage you are considering.

2. The amount of coverage that you purchase cannot be 100% of your salary. This may sound crazy, but its true. There is a little thing called "moral hazard" that is designed to prevent people from carrying too much DI coverage. This is done in order to prevent policy holders from injuring themselves or faking a disability. The premise is that you are less likely do this if you cannot carry your full salary in DI income. So, insurance companies have worked with the Federal Government to set guidelines on the amount of DI coverage that you can purchase. The standard for most work place disability policies that I have seen, (group policies carried by employers), is to cover 60% of their employee's salaries. Most insurance companies will allow an individual to cover up to 80% of their income however, as long as your income is not too high. It is very common for someone to purchase an individual disability policy to cover the gap between a 60% employer plan and the remaining 20% that an insurance company will allow you to carry. (80% allowed minus the 60% employer coverage = 20%)

3. Long term vs short term disability - A long term disability policy is designed to pay for a period longer than six months. These policies have waiting periods of at least 30 days before they begin to pay out. Most group employer plans are long term disability plans. The most common employer plan that I have seen are a standard of a 90 day waiting period, then a 24 month pay out of 60% of the employee's salary.
Short term disability is a plan that can begin payout immediately or with a small waiting period, and usually pays out for a period of 6 months or less to 1 year at the most. These short term plans tend to have smaller premiums and less underwriting requirements. If you have a long term disability plan then you might want to consider a short term disability plan to supplement that policy. This all should depend on how much savings you have in your emergency fund.

4. What effects costs in DI? Your age, sex, amount of coverage, lifestyle and type of occupation can all effect the premiums of a DI policy. A higher risk job will have higher premiums. Lastly, the longer that you can extend your waiting period, the lower your premiums will be. If you have a nice emergency fund and have 6 months of living expenses, then go a 6 month waiting period and keep your DI premiums lower. Insure yourself against a catastrophe not a paper cut!

5. Tax treatment - if you pay into your DI policy with after tax dollars then your disability pay out will be tax free. If you choose to try and write off your DI premiums, then the payout will be taxed, and taxed at a time when you need the highest income you can get. If you are an employer and have found this post searching for a group disability plan for your employees please keep this in mind. You might want to pay the premiums of your employees plan, but include those premiums in the employees taxable income, this way the pay outs will be non-taxable. If you are self employed you can include DI as a business expense, but make sure you include the premiums in your taxable employee income or the benefits or taxable. Please consult your tax or insurance professional on this I would be happy to answer any questions free of charge here. Contact Me

We hope this information helps you in your disability insurance search. If you have any questions or would like a free no hassle quote please contact us. No matter what state you live in we can email you some information.




Click here for the 5 questions that every worker should ask about disability insurance.