Disability income insurance replaces one's income when one is unable to work due to sickness or injury. An individual disability policy is a contract between the insured and the insurance company. As with any other contract, it is important to know the provisions within one's policy. The following is a checklist designed to help you understand the key provisions of individual disability insurance policy.

Waiting Period

Most individual disability policies have a self-insurance period known as the waiting or elimination period. This is the length of time during which one must be disabled before benefits accrue. It is common to see a 90-day or 180-day waiting period although there are shorter and longer periods. 

Benefit Period

This refers to the maximum length of time for which benefits will be payable. The most common benefit period is age 65. Keep in mind some policies have shorter benefit periods for disabilities of a mental nervous or drug and alcohol nature.

Benefit Amount

The benefit amount is the monthly income one receives at the time of a disability. It is generally advisable to purchase as much benefit as income allows. Carriers restrict the amount of benefit available to about 60 percent of one's pre-tax, pre-disability income.

Speaking of taxes, do keep in mind income taxes as the benefit amount may be taxable just like salary. Generally speaking, the benefit amount is taxable if one pays disability premiums with pre-tax dollars or if another person or entity pays the premium on behalf of the insured. Seek guidance from you insurance broker or an accountant to determine the taxability of your benefit.

Definition of Disability

Every disability policy contains language which defines "disability." Read this provision closely as the definition of disability varies from carrier to carrier. Common examples include "unable to work in your own occupation due to sickness or injury," and "unable to work in your occupation for two years and then any occupation for which you are suitable by education, training, and experience." The key here is to minimize the amount of control the carrier has at claim time. The ladder of the two examples illustrates how carriers can ask the insured to return to work after some period of time (two years in our example).

Partial Disability Provision

Many disabilities begin or conclude as partial disability claims so it is important to have a provision in one's disability contract. Some carriers' policies include this provision and others have it as an add-on. Generally speaking, partial disability provisions allow for a pro-rata monthly benefit amount if an insured's disability causes a loss of income between 20 percent and 80 percent. 

Return to Work Provisions

Oftentimes individuals may be able to return to work but income remains low. This is a common scenario for self-employed individuals, those who work on commission, and those dependent upon a client base for income. A solo-practitioner attorney, by way of example, may return to work after two years of disability only to find out their clients now use another attorney.

Return to work provisions allow for a continued benefit if one returns to work but current income remains below pre-disability income. This provision may run congruent with the benefit period, it may be shorter than the benefit period, and some policies do not include this provision. Carefully review you policy particularly if you fall in to one of the aforementioned groups.

Other Add-Ons

There are a number of additional riders one can attach to an individual disability policy. Examples include a cost of living adjustment rider, which indexes the monthly benefit amount based upon a predefined metric, such as the Consumer Price Index or three percent and the like.

Future insurability options allow one to purchase additional disability insurance in the future without proving medical insurability. Although costly, it is generally advisable to add this provision to the policy for younger individuals and those expecting a meaningful increase in income in the future.

Real World Planning

When a disability occurs, one begins fighting a three pronged-foe. There is a fight to physically recover, a fight against depression brought on by the disability, and the battle to stay financially afloat. Fighting all three battles is difficult to say the least. That is why it is generally advisable to purchase as much disability income insurance as one's budget allows for no individual ever has "too much" income at the time of disability.


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