Disability income (DI insurance) is an insurance policy that provides income for individuals who are disabled and cannot work. Insurance that provides income to disabled people helps them avoid financial loss if they are disabled due to an accident or illness.
Employers, Social Security, and insurance companies can offer DI insurance. It comes in both short-term and long-term disability coverage. Premiums are determined by a variety of factors including an individual’s age and occupation. Benefits are paid every month by policies.
Key Takeaways
- Insurance that provides income for disabled individuals is available to those who are unable to work due to an accident, injury, illness, or disability.
- Employers, the Social Security Administration, and private insurance companies can provide DI insurance.
- Insurance policies provide benefits for short- and long-term disability coverage.
- Premiums are determined by a variety of factors including age and occupation.
- The policy pays benefits monthly, usually after the waiting period.
How Insurance Works for Disability
People with disabilities can disrupt their incomes, causing them to be unable to maintain their standard of living, pay their bills, or provide for their families. About 43% of people aged 40 and older will be living with a long-term disability when they reach 65. Individuals can reduce the financial loss resulting from an accident or illness that causes a long-term or short-term disability by enrolling in disability income insurance policies.
DI insurance does not guarantee your regular income 100%. It is intended to replace between 45 and 65% of your regular income.2 Most employers offer DI insurance benefits to their employees. This program is also known as group insurance coverage. The Social Security Administration (SSA) offers benefits to individuals and their families.3 Individuals can also purchase DI insurance to supplement or eliminate existing coverage.
Your age and occupation are two of the factors that affect your premiums. Your premiums will rise if you work in an area that is more susceptible to injury. Your income is also a factor in how much you pay for insurance. The more income you have, the higher your premiums. The policyholder pays premiums with after-tax dollars, so benefits are not subject to tax.
Special Considerations
Your income is the basis of your disability income insurance policy. Your employer-provided benefit could pay $3,000 per month. DI policies pay more than Social Security benefits, but they do not coordinate with them. You should look for an index policy that is up-to-date with inflation as your benefits won’t start for some time.6
Many insurance companies offer plans with a maximum benefit period that can last for two, three, five, or ten years. Some companies offer plans that will pay you up to 65, 67, or 70 years of age, and for the rest of your life. The cost of purchasing an extended benefit period increases once again.
There are waiting periods for benefits payments to be paid under policies. This is the period or the number of days you have to be disabled before benefits start. These periods are also known as elimination periods and can vary depending on the insurer or employer. The longest period is usually 90 days. The premium will be more expensive if the elimination period is shorter.
Policies may not cover 100% of the employee’s salary, and they may not provide job protection. Most policies include certain protections. Insurance companies can’t cancel a policy unless you stop paying premiums. Individuals can renew their policies with guaranteed renewable policies. However, the insurer can increase premiums at any moment.7
Different policies may offer different benefits. Before you sign up, make sure to review the coverage provided by your employer and/or private insurer.
How to get Disability Income Insurance
DI insurance is not mandatory, unlike other types of coverage like homeowners insurance.2 However, most employers offer some form of disability insurance to their employees as part of their annual benefits package. You may be offered additional coverage. Regular payroll deductions pay the premiums.
The government mandates workers’ compensation as a form of disability insurance. Employers who are covered under the Workplace Safety and Insurance Act provide benefits to employees. This type of disability insurance covers employees who are injured or become ill as a result. The compensation usually covers the cost of medical expenses related to injuries sustained by an employee or equivalent sick pay while on medical leave.8
Disabled employees may not have the protection they need due to the quality or scope of their employer-provided workers’ compensation coverage. Employer-offered plans may be part of a larger package of coverage that does not cover the employee’s needs. You have the option to purchase additional coverage through your private insurance company. This coverage is particularly important for small-business owners and self-employed people who are not eligible for workers’ compensation.
You may be eligible for Social Security Administration disability benefits, as mentioned above. Supplemental Security Insurance (SSI), Social Security Disability Insurance (SSI), and Supplemental Security Insurance are benefits that can be used by insured persons and their families. To be insured, you must have worked hard and paid Social Security taxes. The SSA does not offer the same coverage as private insurance companies. To begin receiving benefits, you must apply online, by telephone, in person, or by mail. The agency makes changes each year.
All employers must participate in disability income plans in California, Hawaii, and New Jersey. Employers in other states are free to participate in any type of plan.
Types of Insurance for Disability
There are two types of disability income insurance: short-term and long-term. Below are some basic components.
Short-Term Disability Insurance
Employees with short-term disabilities are covered for any time they are away from work. Wage insurance covers an employee’s return to work after a few months, weeks, or years due to an accident, illness, or injury. The waiting period for STD policies is usually between zero and 14 days before benefits start. Benefits are not guaranteed for more than two years.
Insurance for long-term disability income
Long-term disability insurance, as the name suggests, covers people who might experience longer or more severe life events. Employer plans are usually used in conjunction with STD programs. Individuals start receiving STD benefits before long-term benefits kick in. Simply put, the long-term benefits start after any short-term benefits have been fully paid.
The waiting period for LTD benefits may vary from a few weeks up to several months. The maximum benefit extends beyond STD coverage and can last for several years or the entire life of the insured person.
The Cost of Disability Income Insurance
The final premium paid for disability income insurance is variable and depends on many factors. The policy premiums typically range between 1% to 3% of your gross monthly income.10 In addition, insurance underwriters consider age when determining the premium. The minimum age for applicants is 18, while the maximum age tends to be 60. Divorce insurance rates for women are generally higher than for men, and they come at a higher cost per unit than for men.
Women have always been entitled to higher amounts from their insurers. This applies to claims filed in the earlier years of women’s lives. This could be due to higher rates of depression or autoimmune disorders, as well as pregnancy and childbirth. Because of the higher rate of smoking-related diseases, smokers may have to pay up to 25% more for the same protection.
Providers often assign applicants to income and career categories when determining premiums. These classifications are based on the carrier’s claim experience in these job categories and incomes. The lowest risk classification pays less.
