How Does Disability Insurance Work?

Disability insurance is one of the most critical insurances to have for financial success. As a financial advisor, I recommended this key income protection to manage financial risk while unable to work due to illness or accident. Here is more information about disability insurance.

What is Disability Insurance

Disability insurance pays a portion of the insured‘s income during a disability because of an illness or accident.

Income Protection Choices

Short-Term Disability (STD) – waiting period of an average of 0 to 30 days; maximum benefit period generally lasts 24 months.

Long-Term Disability (LTD) – waiting period varies depending on policy, it can be 30 days to more than 180 days; benefit period can range from 2-5 years and till age 65.

Types of disability insurance policies:

Conditionally renewable policies – insurance rates can increase or your disability coverage can be canceled anytime by the insurer. Avoid these policies.

Noncancelable policies – policy which can’t be canceled by your insurance company, excluding nonpayment of premiums. It is an annually renewable policy without loss of benefits or increase in premiums. Best option.

Guaranteed renewable – policy stays in force as long as the premiums are paid, re-insurability is guaranteed. But, your premiums can increase in future based on any filing of a disability insurance claim for injury or illness.

Disability Income Insurance Offerings

Group disability insurance employee benefits:

Take advantage of any disability protection offered to you at work, sign-up for short-term and long-term disabilities, if offered.

Short term disability is a stop gap measure until long-term disability starts. From the day you report a disability, it may take several days to weeks for the disability claim paperwork to process until you receive your first check. Remember, you don’t receive a check the day you file your claim.

Generally, an insurance company only pays 60% to 65% of your income during a disability. Most importantly, after being taxed on your income, you may only end up getting only 50% -55% of your income. Can your standard of living be maintained on half your income?

Personal individual disability insurance:

Purchase an independent long-term disability policy. You will never get 100% of your income but maybe up to 70% to 80%.

Income from an independent disability policy is tax-free.

Disability insurance benefit can help you

Disability insurance can help you avoid depletion of your finances, an extra burden on top of your disability.

Income protection helps meet your daily expenses and any medical expenses.