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Individual Disability Insurance

Disability insurance provides financial support for you and your loved ones if you’re unable to work.

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What is disability insurance?

Disability insurance, also called disability-income insurance, provides an income if you are unable to work due to illness or injury.

Disability insurance can be offered through your employer (group disability insurance) or you can purchase it independently (individual disability insurance).

Group disability insurance can be both short-term and long-term. Individual disability insurance is most often long-term. It’s less common for insurance companies to offer short-term individual disability insurance.

 

Disability Insurance Terms to Know

Waiting Period

Also called an elimination period. This is the period of time you have to wait after you are disabled until you can start receiving benefits.

Benefit

The amount of money you receive each month in the event you are unable to work due to a disability.

Benefit Period

The length of time you can receive benefits under the terms of the policy.

Premium

The amount you pay for your disability policy.

Claim

If you become disabled, you need to file a disability claim showing proof of disability in order to begin the process and determine if you are eligible for benefits.

Why is disability insurance important?

You can’t predict what your health will be in the future. You may stay active and eat healthy, but most disabilities are actually caused by unexpected illnesses, like cancer, heart conditions, and strokes.

A long-term disability can have a more severe impact on a family’s expenses than the death of an income provider. With the death of an income provider, expenses decrease because there’s one less family member. If the income provider is disabled, expenses increase due to health care costs.

Disability insurance provides a monthly benefit to help you cover living expenses and maintain your lifestyle during a disability. It also provides peace of mind when it’s needed most.

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How long could you survive without a paycheck?

If you were suddenly unable to work tomorrow, what happens?

Everyone should have an emergency fund. A savings account that holds 3-6 months worth of your income. But not everyone has this. And this will deplete quickly.

How do you pay rent or the mortgage payments? Do your kids need to start making sacrifices like no more after-school programs?

Without disability insurance, people may be tempted to access the following accounts. You should try to avoid this.

Retirement plans. At a minimum, these should not be considered liquid assets because tapping them would create tax consequences. If you’re out of work longer than expected, you could be facing a major tax liability with a greatly reduced income. In addition, you should not use long-term assets to solve short-term financial problems.

Investment accounts. One of the problems in liquidating investment accounts – mainly stocks and funds – is that financial emergencies often occur at the worst times for asset prices. If you have to sell stocks to cover missing paychecks, you can bet that it will happen when your stocks are down in price. Once you liquidate them, you’ll be locking in the losses forever.

Credit cards. In a society in which people maintain very little in the way of liquid savings, credit cards are often seen as something of an emergency fund. The problem here is that you are raising liquid cash by creating future obligations. They will represent a reduction of income once you are finally working again.

Home equity line of credit (HELOC). This has the same basic disadvantages of using credit cards, except that it has the added dimension of locking you into very long-term obligations. You will be borrowing long-term to finance the short-term.

Family and friends. We sometimes see borrowing from family and friends as a safe option. But not only are you creating an obligation that needs to be repaid, but you can also be doing long-term damage to important relationships.

1 in 4 of today’s 20-year-olds will become disabled before they retire.

1 in 2 Americans would be in financial trouble in less than a month if they became too hurt or sick to work.

The average long-term disability absence lasts over 2 ½ years.

People are 240 times more likely to incur a disabling injury than suffer a fatal injury.

The Different Types of Disability Insurance

Group Long-Term Disability Insurance

Group disability insurance is not an individual policy you own. This type of disability insurance is offered as a benefit through your employer. Benefits replace a portion of your income if you are out of work for a specific period of time due to a non-work-related illness or injury.

Group disability insurance benefits are not transferable. This means if you leave your current employer, the coverage doesn’t follow you.

A typical group disability insurance policy covers about 60% of your base salary and is capped at $5,000 per month. Because benefits are usually taxed, the remaining after-tax monthly benefit could be as little as 42% of your base income. If you have people relying on you financially, this may not be enough.

The benefits from a long-term disability policy don’t begin until after you’ve passed a waiting period. Common waiting periods for long-term disability are 30, 60, 90, 180, and 365 days. Supplementing long-term disability insurance with short-term disability coverage is ideal. This allows you to have income replacement during the majority of a disability.

Short-Term Disability Insurance

Short-term disability insurance may be available through your employer or bought individually. However, buying short-term disability as an individual policy isn’t common and many insurance companies don’t offer it.

Short-term disability is a type of insurance benefit that provides some income replacement for non-job-related injuries or illnesses that prevent you from working for a limited time period.

Short-term disability has a much shorter waiting period than long-term but the benefits don’t last nearly as long. Short-term disability coverage can be as little as 30 days and as long as one year. If your disability or illness causes you to miss work longer than that time period, what happens then? This is when you would need long-term disability insurance to kick in.

What is individual disability insurance?

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Individual disability insurance is a policy you own completely separate from your employer benefits. By supplementing your group coverage with an individual policy, you can protect more of your income and on a more secure basis. Even if you leave your current employer, coverage from your individual policy will still continue.

How does individual disability insurance work?

Many insurance companies offer individual disability insurance coverage. Through Quotacy you can buy individual disability insurance plans that cover everything from basic to comprehensive needs to suit your budget.

If you become disabled, you will receive the benefits as laid out in your policy. There is often a waiting period before payments begin. However, common waiting periods for individual disability coverage are 30, 60, 90, 180, and 365 days. A few policies are available with a 0-day waiting period but this is only for disabilities that occur from an accident.

Disability insurance policies with a shorter waiting period have higher premiums. If you have the means to pay for typical living expenses for a few months in the event of a disability, you can save money by purchasing a disability policy with a longer waiting period.

For example, the annual premium for a disability insurance policy with a 180-day waiting period can be less than half the cost of a policy with a 30-day waiting period.

Just as disability insurance policies have different waiting periods, they also have different benefit periods. A benefit period is the duration of time in which an insurance company will provide funds to an individual once he or she becomes disabled. Benefit periods can include one year, two years, three years, five years, ten years, to retirement, or even your lifetime. The longer your benefit period, the higher your premium.

For example, the premiums for a disability insurance policy with a two-year benefit period may be 40-50% less expensive than a policy with a benefit period that goes until age 67.

Disability benefits will continue during your benefit period as long as you are disabled according to the policy’s provisions. The insurance company will most likely require proof of continued disability if the duration is long-term. The benefits from a disability policy cease once you are no longer considered disabled.

What qualifies as a disability?

How strict the definition of disability is can be different across plans.

There are three common definitions:

  • own-occupation
  • modified own-occupation
  • any-occupation

Own-occupation disability: Under the own-occupation disability insurance definition, you will receive benefits if you are unable to work in your “own occupation,” regardless of whether you find employment in another profession. This is the most common definition used and more flexible for the policyowner.

Example of Own-Occupation Disability

John is a surgeon who enjoys doing home improvement projects in his free time. One day, John’s hand slips while using his table saw and the accident requires a finger amputation. John can no longer perform surgeries, but may be able to find work in another medical specialty or even work outside the medical industry.

John cannot perform the substantial duties of his own occupation as a surgeon. If he had an own-occupation disability insurance policy, he would receive full benefits, regardless of whether he chooses to work in another medical specialty or another profession altogether.

Modified own-occupation disability: This definition is similar to own-occupation, but full benefits are only paid if you aren’t working. If you choose to work then benefits from the policy are proportionally reduced. This definition can also be referred to as “own occupation if not working”.

Example of Modified Own-Occupation Disability

Jenny is an executive assistant at a law firm. At a routine wellness checkup, she was diagnosed with stage II breast cancer.

Jenny cannot work due to her treatment schedule and nausea side-effects. Her disability insurance policy provides her full benefits.

After a few months, her doctor says she can go back to work part-time. Her disability benefits continue but are reduced by income she is now receiving for work.

Any-occupation disability: Under the any-occupations disability insurance definition, you only receive benefits if you are unable to work in any job that is reasonably suitable for you based on your education, experience, and age. In other words, if you are still capable of working, even at a lower-paying job, an any-occupation policy would not pay.

Example of Any-Occupation Disability

John is a surgeon who enjoys doing home improvement projects in his free time. One day, John’s hand slips while using his table saw and the accident requires a finger amputation. John can no longer perform surgeries, but may be able to find work in another medical specialty or even work outside the medical industry.

Because John is still capable of working in the medical field, if he had an any-occupation disability insurance policy, he would not receive any benefits.

Questions? Talk with our experienced advisors.

How does disability insurance affect Social Security disability benefits?

Any disability insurance policy you have is separate from Social Security disability benefits through the government. You may be able to receive both at the same time. However, it’s easier to get approved for long-term disability insurance than it is for Social Security disability benefits.

What are Social Security disability benefits?

On your paystubs, you’ve probably noticed that a portion is taken out each time for Social Security taxes.

The Social Security disability program is government funded and requires taxes to run, so, in order to be eligible for these benefits, you need to have worked enough time to earn sufficient credits.

In addition to meeting the work length requirements, you need to be considered disabled according to government standards. Their definition of fully disabled means that your current condition prevents you from being able to perform any work of any kind in the national economy’s current state. The Social Security Administration’s website has detailed descriptions of what constitutes a disability.

Many disabled individuals do not end up qualifying for Social Security disability benefits. Of the 2.8 million workers who apply for Social Security disability benefits each year, 65% are denied. And even if you do qualify, it can take a year or longer to get approved.

It’s not enough to rely on the government. You need to own your own disability insurance policy to protect your income for you and your loved ones.

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Receiving Both Social Security Disability Benefits and Long-Term Disability Benefits

It’s possible to receive both types of disability benefits at the same time. In fact, many insurance companies require you to apply for Social Security benefits after a certain period of time. If you get approved for Social Security benefits, the insurance company will then pay the difference.

For example, John is receiving $3,000 per month from his long-term disability insurance policy. He is then approved for Social Security disability benefits at $1000 per month. His insurance company will then reduce the benefits they pay to $2,000 per month.

Disability Insurance: Most Commonly Asked Questions

Why should I buy disability insurance?

Long-term disability insurance makes sense if you and your family rely on your income to live.

Owning disability insurance is key to a solid financial plan as it provides a safety net when you can’t work for an extended period of time due to injury or illness. By replacing part of your earned income, it prevents you and your family from accruing debilitating debt or filing bankruptcy.

Advantages of individual disability insurance:

  • While life insurance protects your family should you die, disability insurance protects your family should you lose the ability to work.
  • Disability insurance helps provide security. It pays a monthly income to help protect your family home, savings accounts, retirement funds and other assets should you become disabled.
  • Monthly benefits are received tax-free.
  • You own the policy and it will stay in place throughout your working years as long as the premiums are paid.

How is disability insurance priced?

For disability insurance, your occupation heavily influences the proper benefit amount and premium rate. The insurance company will put you into an occupation class based on:

  • Your job duties
  • Work environment
  • Income
  • Stability
  • Dual occupations

The table below shows occupation class examples.

ClassOccupation
AShipping and receiving clerk, press worker
2ABuilding inspector, medical assistant
3AAdministrative assistant, bookkeeper, graphic designer
4ALandscape architect, paralegal
5APharmacist, small animal veterinarian, computer engineer
6AAttorney, CPA, engineer

 
These factors also determine the cost of your long-term disability insurance:

  • How long your waiting period is
  • How much of your salary is replaced
  • How long your benefits are paid

Most people find that a policy with these options offer the best value for price:

  • 90-day waiting period
  • Replacing 60% of base salary
  • Paying benefits until no disability or retirement age

Example of Disability Insurance Pricing

This table shows example pricing for individual disability insurance policies for a non-smoking 35-year-old male and female each making $50,000 in a 3A occupation class.

Policy FeaturesComprehensive CoverageModerate CoverageBasic Coverage
Monthly Benefit$2,450
(59% of current income)
$1,850
(44% of current income)
$1500
(36% of current income)
Waiting Period90 days90 days180 days
Benefit PeriodTo age 65To age 655 years
Cost per MonthMale $99.13
Female $178.62
Male $58.68
Female $105.74
Male $21.93
Female $42.64

 
Why women tend to pay more for disability insurance:

When insurance companies set rates, they base them on their claims experience for similar policy holders in the past. Time and again, insurance companies have found that they are much more likely to pay claims for women policyholders than they are for men—and pay them much earlier in life.

There are multiple reasons why: women file claims for pregnancy and childbirth, and are more likely to suffer from autoimmune disorders, anxiety, and depression. And what’s more important from the insurance company’s perspective, women are much more likely to go to the doctor sooner rather than later if they are unwell. This means catching illnesses and injuries earlier and claims then last longer.

Our advisors can customize a plan to suit your needs and budget. Get a disability quote today.

When will my disability benefits start?

Your disability income benefits are paid once your policy’s waiting period is over. Policy options include waiting periods of 30, 60, 90, and 180 days or more. Most people choose a 90-day waiting period and use their savings to cover the first three months.

How long will I be covered by disability insurance?

Benefit periods vary by insurance company but typically options include two years, five years, or to age 65, 67, or 70. Most people choose a long-term disability insurance policy that will pay benefits until they are no longer disabled or until they reach retirement.

Are disability benefits taxed?

If you buy your own individual long-term disability insurance, the benefits are often tax-free as you are paying your own premiums.

Group disability plans often require you to pay income tax on the benefits received as your employer is paying the premiums and deducting the expense.

Need disability insurance?

Consider the effects a disability could have on you and your family’s standard of living and finances. In addition to helping individuals obtain life insurance coverage, we work every day with people needing disability insurance as well.

If you are interested in obtaining a quote, we just need a few pieces of information and then our team will shop the market and provide you with personalized disability insurance quotes with the best options available.

Disability insurance replaces your income when you need it most