03 May What Can I Spend Disability Benefits On?

Did You Know?

The average disability claim lasts nearly 13 months, and disability-related mortgage foreclosures occur 16 times more often than death-related foreclosures. Despite this, more than 40% of full-time jobs do not have disability insurance to protect against income loss in the event of a short- or long-term disability. 

According to study, one-third of all working Americans would become disabled for at least 90 days at some stage during their careers. Nonetheless, inability to receive disability insurance is a common financial blunder.

What is Disability Income Insurance (DI)? 

DI insurance offers supplemental benefits in the event that an injury or accident causes a disability that prohibits the insured from working at their normal job. Benefits are typically paid on a monthly basis so that the insured can maintain a similar standard of life and cover recurring expenses.

Understanding Disability Income Insurance (DI) 

Disability income insurance (DI) is intended to replace between 45 and 65 percent of the insured’s gross income on a tax-free basis. As revenue, some policies include incentives and commissions. Since the policyholder paid premiums with after-tax dollars, the benefits became tax-free. The policy pays a benefit if an illness or accident prevents the policyholder from working and receiving their regular income.

There are certain employer-provided plans and Workers’ Compensation that offer assistance during a disability. However, the value and depth of the coverage can fall short of the insurance needed by the injured individual. Many employer-provided benefits are part of a bundled coverage plan. These plans do not pay to the extent needed to cover an employee’s expenses. In general, Workers’ Compensation only covers injuries suffered while on the job.

When it comes to disability income, self-employed people and small business owners must go it alone. And if the accident is work-related, an individual business owner is not eligible to receive Worker’s Compensation.

Important Takeaways 

• Disability income (DI) insurance pays coverage to insureds who are unable to perform normal work duties due to an accident or illness. 
• Disability income insurance pays a percentage of an insured’s income, usually no more than 60%. 
• DI insurance premiums usually vary from 1.5 to 3 percent of an insured’s gross income. 
• Many disability income plans have a waiting period during which payments from a qualified disability cannot be paid.

Disability Income Insurance Policies 

Disability income insurance plans are not necessarily the same. When comparing policies, keep the following features in mind:

Some policies provide advantages if you are unable to perform the duties of any profession for which you are adequately eligible based on your qualifications, experience, and education. Other plans have incentives if you are unable to fulfill the main duties of your job. Many policies combine these features, offering “own occupation” coverage for a set period of time, usually one to two years. They also offer “any occupation” coverage. 

Some plans often pay benefits if you become sick or disabled and are unable to receive a certain portion of your salary, such as 80% or less. The amount of income you would earn if you were disabled differs depending on the policy. Benefits from all sources, however, are typically limited to 70–80 percent of your monthly income. Policies that pay 50–60% of salary are the most common. 

The majority of policies do not compensate for commission or incentive revenue. If you buy your own insurance, your disability payments are normally excluded from income taxes. However, benefits are taxable if the employer pays for the disability insurance plan. 

Policies have either level premiums (intended to remain constant during the policy’s term) or premiums that rise as you age. A level premium policy could be sufficient if you plan to keep your policy in place for an extended period of time. If you are unsure how long you will need insurance, a policy with age-based premiums could be a better option. 

Different programs have different waiting periods (known as elimination periods) before you can start earning benefits. You can reduce your premiums by waiting 90 days, six months, or even a year before receiving benefits.

Some programs require total disability before payment can begin, while others cover partial disability. Some insurance plans have “residual” benefits. If you are still able to function but your impairment prohibits you from fulfilling any of your usual duties, these payments will reimburse you for any missed income. 

Some plans pay for career preparation or other help you may need to return to work, such as improvements to your work environment. As an added bonus, certain plans include cost-of-living increases in the amount billed to the insured. The vast majority of individual policies are either non-cancelable or guaranteed renewable. 

Premiums on a noncancellable policy can never be increased. Premiums for a guaranteed renewable policy cannot be raised depending on an individual’s circumstances, but they can be raised for a group of policyholders. A guaranteed renewable policy may specify how a class is defined; for example, all policyholders in a state that own the same type of policy may form one class. Inquire about the conditions that allow premiums to be increased and how classes are described.

How Much Does Disability Income Insurance Cost?

The final premium for disability income benefits is decided by a range of factors. Policy premiums usually range between 1.5 and 3 percent of gross income. Age is often taken into account by insurance underwriters during the underwriting process. Applicants must be at least 18 years old, and the highest age is typically 60. In comparison to life insurance, DI premiums for female applicants are higher per unit of coverage than those for male applicants. 

According to claims results, insurers have traditionally paid more and greater dollar amount claims for women than men and at a younger age. This may be due to higher rates of depression and autoimmune conditions, as well as pregnancy and childbirth. Additionally, because of the higher prevalence of smoking-related diseases, smokers should expect to pay up to 25% more for the same insurance as a nonsmoker. 

When calculating premiums, insurers can categorize applicants based on their occupation and income. These classifications are based on the carrier’s claim experience for these work categories and income levels. The classification with the lowest risk would earn a lower wage.

The benefits offered by disability income insurance are not intended to replace the insured’s pre-disability income in its entirety. If an insured’s income was completely replaced, there would be no financial motivation for him or her to return to work. This may lead to higher claims rates and premium costs. However, financial experts suggest that people try to buy enough coverage to prevent a significant reduction in income and lifestyle if they become disabled.

Income Benefit Formula 

The income benefit formula usually expresses the amount of benefit to be paid to the insured as a percentage of pre-disability earnings and can take into account other sources of income received by the injured insured, such as social security or worker’s compensation benefits. The percentage varies by policy and can vary between 50 and 75 percent. The policy could also specify a maximum profit.

Fixed Benefit Amount

The benefit sum may be a predetermined monetary amount stated in the policy. This amount is calculated at the time the policy is purchased. The sum is typically paid regardless of other benefits earned during the disability period.

Disability Income Insurance Benefits

A serious illness or accident can have an effect on more than just your health; it can also affect your ability to work and meet your family’s living expenses. Disability income protection assists you in meeting your living costs if you are unable to function. 

It provides paycheck insurance by sending cash directly to you for use on mortgage or rent payments, groceries, utility bills, car payments, or whatever else you want. A policy can also pay for training or other assistance you may need in order to return to work.

Consider what would happen if you were injured or sick and were unable to function for days, months, or even years. Do you have any sources of help if you’re single? If you’re married, you may be able to depend on your spouse for money, but you’re still likely to have a number of financial commitments, such as raising your children and paying your mortgage. 

Is your spouse’s salary adequate to sustain your entire family? Also, keep in mind that you do not have to be employed in a dangerous role to require disability insurance. Accidents occur not only on the job but also at home, and disease can hit everyone at any time.

If you own a company, disability insurance will benefit you in a number of ways. To begin, you may buy an individual policy to protect your own profits. You can also buy key individual insurance to shield yourself from the financial consequences of losing a valuable employee. Finally, you can buy a disability insurance policy that will allow you to purchase your partner’s business interest if he or she becomes disabled.

Medical expenses: If you become ill, you should expect your medical expenses to increase. Assuming you have health insurance, you would most likely be required to meet a premium as well as an out-of-pocket limit, which could raise the expenditures immediately after your impairment. This can easily cost you hundreds of dollars. To support your condition, you might also need to purchase medical equipment or supplies, or even renovate your home.

Also, if you are unable to work due to a long-term injury, your community medical insurance policy will be terminated. If you work for a big enough company, you might be able to extend coverage on your employer’s plan under a government regulation known as COBRA, but you’ll have to pay the premium yourself, and coverage cannot usually last longer than 18 months.

Living expenses: What if you become disabled and are unable to drive, clean your apartment or home, mow the lawn, or cook for yourself? Would you need to employ household help to take care of day-to-day tasks that you are unable to perform? When you become disabled, hiring support can be a major and unforeseen cost.

Child-care costs: If you have small children and both you and your spouse work, you are aware of how costly childcare can be. Can you afford it if either you or your spouse are ill and unable to work? If the disabled partner’s condition is too severe, he or she may be unable to care for the children at home. If you currently remain at home with your children, you may be required to return to work if your spouse becomes injured, and you may face an unexpected potential cost.

Policyholder Tips

• Look around. Compare plans from different firms. Do not feel rushed to make a decision. 
• Ask questions. 
• Confirm that the agent and company with which you want to do business are both licensed in the state you are applying for coverage in. 
• Ensure that you fully comprehend any policy you are considering and that you are at ease with the business, agent, and product. 
• Do not sign an insurance application until you have thoroughly checked it to ensure that all of the responses are complete and reliable. 
• Do NOT pay with cash. Make your check or money order payable to the insurance provider, not the agent, when purchasing a policy. Be certain to receive a receipt. 
• Read your policy and keep it in a protected location.
• Ensure that all claim forms are completed on time, absolutely, and correctly.

Final Thoughts

You should have enough disability income insurance to cover at least your monthly living costs, allowing you and your family to concentrate on what is most important during this crucial time…your recovery. You depend on your income to help you make ends meet. As a result, it is important to secure your income at every age during your working years.

Now is the perfect time to purchase disability income benefits. A debilitating illness or injury can strike at any age and at any time. Furthermore, since premiums are based in part on your age at the time of payment, avoiding coverage might cost you more. Isn’t it necessary enough to get started today, given all your income provides and the financial goals you’ve set?