What is Disability Insurance?

Written by: Scott Sery

When you purchase a house, even without a mortgage, you do not think twice about getting a homeowner’s insurance policy.  When you start a job, however, most people do not even consider getting a disability insurance policy.  While it is important to protect a $200,000 home, it is even more important to protect potentially millions of dollars worth of income.  Since the risk of being disabled is so high, many employers will provide the insurance as a benefit to their employees.  But what exactly does a disability insurance policy cover?

Group Coverage

Group disability insurance is a benefit usually provided at no cost to the employee.  What this means though is that if the employee is disabled, payments that they receive from the policy are taxable.  While it is nice to have some coverage provided through work, it is often not nearly enough to keep people going.  Most group policies will provide a benefit that replaces 60% of the employee’s salary (to a maximum of between $5,000 and $10,000 per month).

Individual Coverage

Unlike group coverage, the individual coverage is only capped by what the insurance company issuing the policy is willing to cover.  Most people can insure up to 95% of their income, and the benefit they receive is rarely taxable.

Before you decide to buy any insurance policy, make sure to read it.  Some companies will offer cheap insurance, but there will be so many riders, that many claims will end up being denied.  When you do apply, you will need to choose your waiting period.  Just like auto insurance has a deductible, disability insurance does too.  Instead of being measured in dollars, the deductible is measured in days with 90 or 180 being the most common.  This means the insured must be disabled for 90 or 180 days before the policy will start paying any claims.

There is a big difference between own occupation coverage and any occupation coverage.   “Any occupation” means that a policy will only provide benefits if the insured cannot work in any occupation.  On the other hand, those with an “own occupation” policy can collect payments if they cannot return to their own occupation.  So a surgeon who has his hand crushed in an accident could still go back to work as a teacher and collect both the payment from the insurance policy, and his salary as a teacher.

A lot of people feel disability insurance is a rip off.  While it is important to protect your earning ability, it is important to get the insurance through a trusted and financially fit company.  There is no harm in getting a quote, and you do not need to insure yourself for the maximum allowable coverage.  At the very least a person should get enough coverage to make sure the rent and basic living expenses are covered.  The longer you wait to get insurance, the more likely you are to be denied coverage due to some health problem.  So take the time now to make sure you are protected so if disaster does hit, you can be prepared.


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What is Disability Insurance?

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