FACT: NO ONE enjoys worrying about bills. In fact, a recent study showed that 11 out of 10 people can't stand the sick feeling in their stomach that comes from dealing with them every month.
So what happens if you get seriously injured, or seriously ill? If you can't work, you don't make money. And if you don't make money, you can't pay bills. Luckily, there's disability income insurance to help keep you afloat while you're on the mend.
Don't know where to start, though? An independent insurance agent can help. They're absolute experts when it comes to all types of insurance, especially disability income.
They'll help walk you through all the different types of disability income insurance, including different plan options and what they cover, and they'll even shop around to get the best deal for you. How easy is that? But first, here's a little background to give you a better understanding.
What Is Disability Income Insurance?
A good place to start is at the beginning. And in the beginning, you find out exactly what disability income insurance is. It's a great tool that supplements anywhere from 40% to 70% of your income when you become temporarily or permanently disabled or ill.
This is the type of disability or illness that makes you unable to perform your regular job duties. You now have the basics, next are the juicy details.
What Types of Disability Income Insurance Are Out There?
Buckle up, because you're on your way to information town. When it comes to disability income insurance, there are several different types to choose from, and what you pick definitely matters.
- Individual disability insurance: This is all about supplementing your income in the not-so-rare event that you will need it due to an injury or illness. Be sure not to confuse this policy with coverage for getting hurt on the job. Getting injured at work actually falls under your employer's workers' compensation policy. Typically, you are getting this policy on your own if your employer doesn't offer it, or if you’re self-employed.
- Individual long-term disability insurance: This provides a portion of your income, as much as 60% - 70%, for as long as your disability keeps you away from work, whether it's years or even decades. Typically, your benefits won’t become available until 90 days into your disability or illness, so be prepared for that. This coverage isn't normally offered by your employer, and if it is, the coverage can be pretty basic. Luckily, if you find your employer’s plan isn't a slam dunk, you can supplement it with another policy on your own through your independent insurance agent.
- Individual short-term disability insurance: This is your other not so long-term friend. And while it covers about 40% - 60% of your income, similar to your long-term friend above, it only lasts a fraction as long. This policy will be in use for months, at the most a year, and is often provided by your employer. Unlike long-term, a short-term disability policy will kick in fast (usually within 14 days), before vanishing like the wind.
- Group disability insurance: Pile an eligible group of employees together and offer them basic disability income insurance at a group rate, and there you have it, group disability insurance. This plan is pretty simple for your employer to offer, pulling all qualified employees together in one easy policy. One of the benefits of group disability is that it covers employees regardless of their health. This makes the rates on average lower than your individual disability insurance, but the coverage is still pretty basic.
- Group long-term disability: Group long-term disability is provided by your employer and assists in paying a portion of your income for a long-term illness or disability if it keeps you from doing your job. Coverage can last for years or more, depending on the policy terms. Like the group disability insurance above, this plan is provided to eligible employees and isn't dependent on health status.
- Group short-term disability: Group short-term disability is like the rest of the group plans discussed, and is provided through your employer. It assists with income replacement during an employee's short-term illness or disability, and coverage lasts an average of 1 - 6 months. It's possible to use your group short-term disability and then move to your group long-term disability plan if the need arises.
- Voluntary disability insurance: This is another employer-offered disability insurance. Voluntary means that the insurance or benefit is volunteered by you, usually during the beginning of employment or during open enrollment. As in, you volunteer to participate in any or all of the benefits offered. Short-term disability plans are normally the type of benefit that employers offer in the voluntary offering, among others.
Before you feel all overwhelmed, just know that your independent insurance agent will help walk you through all your best options and help you decide on the right coverage for your specific needs. So, phew...
Disability Income Insurance Benefits
The benefits paid out from all disability income insurance policies are based on a portion of your income. This is paid on a monthly basis so as to not rock the boat by dumping a lump sum of cash in your lap at once. The portion of your income is between 40% and 70% depending on your plan and budget.
Considering that 1 in 4 working adults will have some sort of disability that puts them out of work for up to a year, it’s pretty important to have.
What Is a Disability Insurance Rider?
This is one good policy when disability insurance riders are involved. A disability insurance rider is added to a life insurance policy, giving you access to a certain amount of coverage for a critical illness or disability.
This is a long-term disability rider the majority of the time. It’s really a great thing and there are some different options for it that can be discussed with your independent insurance agent.
Are Taxes Paid on a Disability Income Insurance Policy?
No matter where you look, taxes always seem to come up. But when it comes to your disability income insurance taxes, it’s pretty simple. If you paid your premium with after-tax dollars, then your benefits are tax-free. If you paid them with pre-tax dollars, then you'll owe income tax on any benefits you receive.
If your employer pays the premiums and doesn't include the coverage cost in your gross income at the end of the year, then your benefits will be taxable. And if you have a government disability income insurance plan, then the answer is yes, no, maybe so.
It all depends on the type of government disability you are receiving and the circumstance in which you are receiving it. Then it could be all, none, or some taxable.
What Is a Disability Insurance Program?
This is where you receive disability income insurance through some sort of government assistance. The main ones that are commonly known are Social Security, Medicaid, and Medicare.
There are about 13 others that would take a law degree to go over, so the basics are a good starting point. If you're a researcher by nature, then take a look at the ASPE webpage for other offerings and associated chapters.
What Are State Disability Insurance Programs?
State disability insurance programs are provided in many states and offer, through state funding, disability income insurance to help supplement your income. They're made possible by mandatory employee contribution of funds to the programs.
The nice piece of this mandatory puzzle is that the contributions made by employees are tax-deductible and can lower their overall tax payouts to the state.
How Your Independent Insurance Agent Can Help
Congrats, this was a ton of information on disability insurance and you made it through it all. Now, if you’re like most people, you probably won’t memorize it all unless there's a test. But no test here. All this background is a great place to start your conversation with a local independent insurance agent.
They're there to help fill in any holes you may have questions about, find the right coverage at the best price, and they'll stick by your side should any problems come up. How great is that?
Learn More about Disability Income Insurance
If you’d like to learn more about disability income insurance, there are a number of other informative articles right here that can help you further than this overview. There's a lot more to discuss and getting the lowdown on all things disability income insurance is always a good idea. Good luck, and get better soon.
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ASPE. (01/01/1990). Federal Programs for Persons with Disabilities. https://aspe.hhs.gov/basic-report/federal-programs-persons-disabilities