Comprehensive Guide to Disability Insurance

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Disability insurance is essential for protecting your income and ensuring financial stability in the event that you are unable to work due to illness or injury. Here’s a detailed guide on what to look for when considering disability insurance, ensuring you choose the best policy for your needs.

How Much Disability Insurance Do I Need?

The coverage amount is a crucial aspect of disability insurance. It determines the benefit you’ll receive if you become unable to work. Typically, it’s a percentage of your current income, often around 60-70%.

For example, if your monthly income is $5,000, a 60% coverage plan would provide a $3,000 monthly benefit. Ensuring this amount aligns with your financial needs is essential​.

Disability Insurance Calculator

A disability insurance calculator estimates the amount of income protection needed in the event of a disability. You can use this as a guide to see what type of coverage amount you would need.

Types Of Disability Insurance

Disability insurance policies can vary in duration:

  • Short-Term Disability Insurance (STD): Covers disabilities lasting a few months to a year.
  • Long-Term Disability Insurance (LTD): Provides benefits for several years or until retirement, depending on the policy. Choose based on your financial stability and the likelihood of needing longer-term coverage​.

Related Reading: Short-Term vs. Long-Term Disability

Define “Disability”

Understanding how the policy defines “disability” is vital:

  • Own Occupation: Pays benefits if you cannot perform your specific job.
  • Any Occupation: Pays only if you cannot perform any job. If you have a specialized occupation, “own occupation” coverage might be more suitable​​.

The Waiting Period (Elimination Period)

The waiting period is the time between becoming disabled and when benefits start. Common waiting periods range from 30 to 365 days. Generally, a longer waiting period results in lower premiums. Choose a waiting period that you can financially sustain without income​.

Additional Policy Riders

Riders are additional benefits that enhance your coverage:

  • Cost-of-Living Adjustment (COLA): Increases your benefits to keep up with inflation.
  • Residual or Partial Disability Rider: Provides benefits if you are partially disabled and suffer a loss of income.
  • Catastrophic Disability Rider: Offers additional benefits for severe disabilities requiring long-term care​.
What Is Disability Insurance

How Premiums Are Paid

Premiums can either be level (fixed throughout the policy term) or graded (starting lower and increasing over time). Level premiums provide long-term cost predictability, while graded premiums can initially be more affordable but may increase significantly​.

Insurance Company Reputation

Consider the insurer’s financial strength and customer service reputation. A financially stable company ensures reliability in paying claims, and good customer service can ease the process during a claim. Look at customer reviews and ratings from agencies like AM Best, Moody’s, or Standard & Poor’s​.

The Best Disability Insurance Companies

  • MassMutual
    • A comprehensive range of products, including individual coverage, Business Overhead Expense (BOE), and Buy/Sell agreements
    • Tailored products for older individuals aged 65-70
    • Specializes in serving white-collar professionals
    • A++ rating for financial strength and reliability
  • Assurity
    • Caters to both white-collar and blue-collar workers
    • Customized disability options such as no income verification and occupational class upgrades
    • Social Security DI rider to offset premiums
    • Unique return of premium rider
    • Graded disability products for individuals with health issues
  • Petersen International Underwriters
    • Builds products around Lloyd’s of London for niche coverage solutions
    • Recommended for supplementing coverage that traditional companies may not offer
    • Capable of underwriting unhealthy clients with specific exclusions
      • Example: Coverage available for someone with a current knee problem, excluding the knee condition from claims

Non-cancelable vs. Guaranteed Renewable Policies

  • Non-Cancelable Policies: The insurer cannot cancel the policy, increase premiums, or change the terms as long as you pay the premiums.
  • Guaranteed Renewable Policies: The insurer can raise premiums but cannot cancel the policy or change terms if premiums are paid.

Exclusions and Limitations

Review any exclusions or limitations in the policy. Common exclusions might include disabilities caused by pre-existing conditions, self-inflicted injuries, or acts of war. Understanding these can prevent surprises during a claim​.

Why Disability Insurance Doesn’t Pay 100% Of Your Salary

Disability insurance typically pays 60-70% of your income for several reasons:

  • Incentive to Return to Work: Providing a full income might reduce the incentive for individuals to return to work, which could lead to longer periods of claiming benefits.
  • Moral Hazard: Full income replacement can lead to moral hazard, where individuals might not be motivated to seek recovery or employment.
  • Cost Control: Insurers limit benefits to control costs and keep premiums affordable for policyholders.
  • Other Income Sources: It assumes you may have other income sources, such as savings, spousal income, or investments, to cover the gap​.

The Average Cost of Disability Insurance

The cost of disability insurance typically ranges from 1% to 3% of your annual income. Various factors can influence the actual cost, including:

  • Age: Older individuals usually pay higher premiums due to increased health risks.
  • Health: Current health status and medical history can affect premiums. Pre-existing conditions may lead to higher costs.
  • Occupation: Higher-risk jobs (e.g., construction) generally have higher premiums than desk jobs.
  • Waiting Period: A longer elimination period can reduce the premium as the insurer’s risk decreases.
  • Coverage Amount: Higher income replacement percentages and longer benefit periods usually result in higher premiums​​.

Why Work with a Disability Insurance Broker

You should work with a disability insurance broker like The Annuity Expert. A broker can help you navigate the complexities of different policies, compare options from various insurers, and find the best coverage to meet your specific needs. Their expertise ensures that you understand all aspects of your policy and get the most suitable protection for your circumstances.

Additional Considerations

Drug Testing for Disability Insurance

Insurance companies may require medical exams and drug tests, especially for high-benefit amounts or high-risk occupations. The necessity for an exam varies based on the benefit amount, applicant’s age, and occupation​​.

Dropping Disability Insurance

Before dropping disability insurance, consider your financial stability, alternative coverage options, and the potential difficulty of obtaining new coverage later. Ensure you have enough savings and understand your employer and government benefit options​​.

Private vs. Government Disability Insurance

Private disability insurance is ideal for high-income earners or those with significant assets, as it does not have the income or asset limits that government programs do. Policies can be customized to cover a percentage of your income, ensuring financial security without the constraints of government income limits​.

Disability Insurance

What We Recommend

Choosing the right disability insurance policy involves evaluating these factors to ensure comprehensive and affordable coverage. Carefully read the policy details and consult with an insurance advisor if needed to understand all terms and conditions.

By understanding and considering these elements, you can select a disability insurance policy that provides the financial protection you need in the event of a disability.

Contact us for personalized advice. Our experts are here to assist with your disability insurance needs.

Disability Insurance Assistance

Get free help applying for Disability Insurance from Our Agents.

Disability Insurance Inquiry

Questions From Our Readers

What medical conditions qualify for disability?

Medical conditions that qualify for disability often include chronic illnesses, severe physical injuries, mental health disorders, and conditions causing significant functional limitations.

Why are disability insurance premiums higher for women?

Women generally have higher premiums because they statistically file more claims and have longer claim durations compared to men.

Is disability taxable?

Disability benefits may be taxable depending on the source of the payments and the individual’s overall tax situation.

Who is best suited for long-term care disability insurance?

Individuals with high-risk jobs or those seeking extended coverage until retirement are best suited for long-term care disability insurance.

What are acceptable pre-existing conditions for disability insurance?

Acceptable pre-existing conditions for disability insurance vary by insurer but often include controlled conditions like hypertension, mild asthma, and some mental health disorders.

When does disability insurance stop paying benefits?

Disability insurance stops paying benefits at the end of the policy term, which could be a specified number of years or until retirement age.

How many disability plans can you purchase?

You can purchase multiple disability plans, but the total benefit amount typically cannot exceed your current income or a specific percentage of it, as defined by insurers.

Does disability insurance run out?

Disability insurance can run out if the benefit period, the predetermined time during which you receive payments, expires.

What happens when you cancel disability insurance?

When you cancel disability insurance, coverage stops, future benefit payments cease, and you typically don’t receive refunds for prior premiums.

What are the differences between disability insurance and Social Security disability benefits?

Disability insurance provides personally funded, often quicker access to benefits, while Social Security disability offers government-funded support with typically stricter qualification criteria and longer processing times.

What are disability insurance coordinated benefits?

Disability insurance coordinated benefits are reduced payments from a policy when a policyholder receives additional disability income from other sources, ensuring combined benefits don’t exceed pre-disability earnings.

Can you receive disability insurance when you are 50?

Yes, you can receive disability insurance at age 50, but premiums may be higher compared to younger individuals.

What is considered Accidental Death in Disability Insurance?

Accidental death in disability insurance is death caused by an unexpected and unintentional event, like a car accident or fall.

What are the cons of disability insurance?

Cons include high premiums, especially for high-risk individuals, limited coverage, and potentially strict underwriting processes.

What Are Different Types Of Disability Insurance?

Short-term disability Insurance, Long-Term Disability Insurance, Group Disability Insurance, Own-Occupation Disability Insurance, Any-Occupation Disability Insurance, Partial or Residual Disability Insurance, and High-Limit Disability Insurance are available.

Does disability insurance premium increase with age?

Yes, disability insurance premiums typically increase with age due to the higher risk of disability as you get older.

Does disability insurance accumulate cash value?

No, disability insurance policies do not accumulate cash value.

Do you have to take a medical exam for disability insurance?

A medical exam is often required, especially for higher benefit amounts or if you have health issues.

Do they drug test for disability insurance?

Yes, drug tests may be part of the medical exam for disability insurance, particularly for high-benefit amounts.

What happens if you fail a drug test on disability insurance?

Failing a drug test can lead to denial of coverage or higher premiums due to increased risk assessment.

How much disability insurance do I need?

You generally need enough disability insurance to cover 60-70% of your current income.

What reasons do people get denied disability insurance?

Common reasons for denial include pre-existing health conditions, high-risk occupations, and failing medical or drug tests.

Is supplemental disability insurance worth it?

Yes, supplemental disability insurance can be worth it to cover gaps in employer-provided plans and ensure comprehensive coverage.

How long do long-term disability benefits last?

Long-term disability benefits typically last between 2 years and retirement age (65 or 67), depending on the policy. Some policies may offer lifetime benefits. The duration is determined by the policy terms and the nature of the disability.

Are disability insurance premiums tax deductible?

No, personal disability insurance premiums are not tax-deductible. However, benefits received from these policies are typically tax-free. If your employer pays the premiums, then benefits you receive may be taxable.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

Scroll to Top