Disability Income Insurance

What Is Disability Income Insurance?

The term disability income insurance refers to an insurance policy that provides income to individuals who can no longer work because of a disability. Disability income insurance helps protect people from financial losses if an accident or illness renders them incapable of working and receiving regular income.

Disability income insurance is available through employers, Social Security, or insurance companies and comes in short-term and long-term disability coverage. Premiums are based on a number of factors, including a person's age and occupation. Policies pay benefits on a monthly basis.

How Disability Income Insurance Works

Disabilities can cause a disruption in incomes and prevent people from maintaining their standards of living, paying their bills, or providing for their families. As many as 43% of individuals aged 40 will have a long-term disability ​​​​​​​by the time they turn 65. Enrolling in a disability income insurance policy can help individuals mitigate any losses that stem from an illness or accident that leads to a short- or long-term disability.

Disability income insurance isn't designed to guarantee 100% of your regular income. Instead, it intends to replace between 45% and 65% of your gross income. As noted above, many employers provide their employees with disability income insurance benefits. This type of program is referred to as group insurance coverage. Benefits are also available to insured individuals and their families through the Social Security Administration (SSA)—though receiving these benefits may be quite difficult to get. Individuals may also choose to purchase disability income insurance to supplement existing coverage or if they don't have any insurance at all.

Premiums are based on a series of factors, including your age and occupation. If you work in a field that has a higher risk of injury, your premiums will be higher. The amount of income you receive is also factored into how much you pay for coverage—the more you earn (which equates to a greater benefit received), the higher your premiums. Policies pay benefits in the event that illness, accident, or injury prevents you from performing the material and substantial duties of your occupation. Benefits are tax-free when the policyholder uses after-tax dollars to pay premiums.

Business Overhead Expense Insurance (for business owners)

Business Overhead Expense Insurance reimburses a business owner for business expenses incurred during an owner's disability. Covered expenses are those that are deductible for federal income tax purposes, such as replacement salaries, utilities, phone bills, and lease payments.