Individual Disability Insurance 101

Individual Disability Insurance 101

(Everything you need to know - and more)

Individual disability insurance

What would you do if you were unable to work because of an illness or injury? The financial impact of a disability can be devastating.  A 28-year-old worker has a one in four chance of becoming disabled before retirement. Fifty-one million American workers have no disability insurance other than Social Security.

Individual disability insurance pays a benefit if you can’t work because of injury or illness. It can protect both individuals and businesses. Get the facts right here.

Contact an independent insurance agent. Learn how to protect yourself and your family if a disability keeps you from working. 

What Is Individual Disability Insurance?

Individual disability insurance pays a benefit if you can’t work because of illness or injury. All individual disability plans have a few things in common.

The “definition of disability” describes when benefits are payable. The benefit period is how long they are payable, and the elimination period is how long after disability occurs do benefits get paid. 

Disability plans also have exclusions that describe when benefits aren't payable. You own the coverage. It goes with you no matter who you work for. The benefits are tax-free, so you can buy fewer benefits to cover your expenses.

No one can cancel your coverage as long as you pay the premium, and the insurance can protect you throughout your career.

Individual Long-Term Disability

Individual long-term disability insurance is the most comprehensive type of disability insurance.  It can be customized to fit specific needs and budgets. Coverage is available for professionals, executives, business owners, office workers, and many trades.

There are three definitions of disability to choose from. True own occupation, modified own occupation, and any gainful employment. 

True own occupation is the most expensive. Benefits are payable if you can’t do your specific job. It doesn’t matter if you are receiving income from a different job. It is designed to protect professionals and specialists. 

Modified own occupation is very common. It pays benefits if you can’t do your specific job. You cannot receive income from any other employment.  

Any gainful occupation is the least expensive and offers basic protections. It pays benefits if you can’t do any job that you are “reasonably suited for.”

Benefit Period

Benefit periods are 2, 5, 10 years or to age 65. The elimination period is 30 days to 1 year. 

Individual long-term disability policies can be:

  • Guaranteed renewable: The insurance company cannot cancel the coverage. They may raise the premium on a group or class of people insured, and the state insurance department must approve the change.
  • Non-cancelable and guaranteed renewable: The insurance company can’t cancel the coverage and cannot raise the premium. 
  • Conditionally renewable policies: The insurance company has the right to cancel the coverage or raise the premium. Generally, conditionally renewable policies should be avoided.

Benefits are payable when the definition of disability is met and the elimination period is satisfied. 

There is an application process for individual long-term disability called underwriting. The insurance company will need medical and financial information to issue a disability policy. Insurance companies limit the amount of benefit to 70% of salary. 

Individual long-term disability insurance can be used to:

  • Protect business owners and employees
  • Supplement group plans
  • Protect retirement plans

The benefits for individual long-term disability are not taxable if the premiums are paid personally.

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Individual Short-Term Disability

Individual short-term disability can pay benefits for illness and injury not covered by long-term disability. Short-term disability pays benefits for a limited period of time — three to six months. Short-term disability benefits can begin immediately and the application process is easy and fast.

Individual short-term disability does cover pregnancy under limited circumstances. Benefits for preexisting conditions are excluded or very limited, and mental and nervous disorders are excluded. Most polices only cover off-the-job injuries or illness. They are guaranteed renewable. 

Individual short-term disability can be used with long-term disability or by itself.

Individual Disability for Self-Employed

There are some more individual disability programs available to business owners:

  • Voluntary Individual Disability: These individual plans are bought through payroll deduction. Participants own and pay for their policies.
  • Business Overhead Expense: This coverage is for small businesses. If an owner becomes disabled, the coverage will reimburse routine overhead expenses. Rent, utilities, employee salaries, payroll taxes are covered.  Business overhead expense does not cover salary for the owner.

Protect Your Most Valuable Asset

Most people insure important assets against loss. Homeowners insurance, auto insurance, and umbrella policies all provide protection.  Fifty percent of working Americans don't have long-term disability insurance to protect their most valuable asset — their ability to earn income. A college graduate with a bachelor’s degree can expect to earn $2.4 million over their lifetime!

Three Steps to a Solid Plan

How your benefits are taxed makes a difference. If your benefits are taxable, you need more of them to pay your expenses. Here are three simple steps to take for a solid plan for disability.

1. Review your budget. Determine how much money is coming and going out each month.

2. If you were disabled, what are your sources of income? When do they start and end? Remember, taxable benefits provide less money.

  • Employer sick pay
  • Short- and long-term disability
  • Social security
  • Other household income
  • Savings

Do your expenses exceed your income? If not, great job! If they do, by how much?

3. Build an action plan. Consider buying personal disability insurance to supplement your income. 

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Our independent agents shop around to find you the best coverage.

What's So Great About an Independent Insurance Agent?

Insurance policies are complex, and searching through options can be confusing, time-consuming, and frustrating. An independent insurance agent's role is to simplify the process.

They will make sure you get the right coverage that meets your unique needs and will break down all the jargon so that you understand exactly what you're getting.

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Council For Disability awareness, ACLI,SSA