Key Elements in Disability Income Insurance

Prospective insurance buyers are often confused about disability income insurance because the features and benefits can vary widely from one policy to another. Essentially, there are a few key elements that could make a big difference when you make your choice. If you are in the market for disability income insurance, here are some significant points to consider:

Definition of “Total Disability.” Does the policy define total disability as a condition during which you cannot perform the duties of your “own occupation” or “any occupation”? A policy that refers to your “own occupation” generally pays benefits if you cannot return to work in your own field, or if you return to work in a lower-paying job or a job in another occupation. A policy that refers to “any occupation” generally pays benefits only if you are unable to perform any job: your own job, a lower-paying job, or a job in a new occupation.

Duration of Benefits. Even if you have to choose a smaller benefit amount to keep the premiums affordable, look for coverage that protects you until age 65. Note: There are policies available that offer benefits only for a limited period (such as a maximum of two or five years) and the nature of your occupation may affect the duration of coverage.

Amount of Coverage. Most plans set a limit on the percentage of income you can insure—usually 50% to 70% of your total gross earnings. If you have an employer-provided plan that offers only limited group coverage, you may consider buying supplemental individualdisability income coverage.

Elimination Period. The waiting or “elimination” period is the amount of time you must wait before disability benefits begin to be paid. While a shorter waiting period requires a higher premium, a longer waiting period may mean more out-of-pocket costs before benefits begin. The waiting period is determined when a policy is issued, not when you sustain the disability.

Taxation of Benefits. Benefits may be tax free if you pay the premiums using after-tax dollars. If you receive benefits under an employer-provided plan, they may be taxable if the premiums are paid with pre-tax dollars. Consult your tax professional for specific guidance.

Partial or “Residual” Coverage. After a serious disability, many people are able to return to work only on a part-time basis. Partial or “residual” benefits allow you to receive partial disability benefits, as well as your part-time income, until you fully recover. Without this feature, your benefits may stop as soon as you return to work, even if it is only part-time.

Portable Coverage. Policies that allow you to carry your coverage from one job to another have an obvious advantage. For example, coverage from a professional association could provide portable coverage that is not tied to your place of employment, not to mention any individual disability income policy that you might purchase independently.

Of course, before shopping for a policy that best suits your situation, it is important to determine the amount of coverage needed. Make it a point to review your insurance coverage and needs on a regular basis in order to help ensure you are adequately protected.


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