Individual disability income insurance pays you benefits if you can't work because you're sick or injured. Some individual policies pay partial benefits if you can only work part-time due to sickness or injury. Individual policies specify how much you will be paid, how soon after you are disabled benefits will begin, and when benefits will end. Policies generally provide replacement of 50 to 70 percent of income. The length of time for which you may receive benefits can depend on whether accident or illness caused the disability. Monthly benefits are payable for a fixed period set forth in the policy, e.g. 2 years, 5 years, to age 65, or for the rest of your life, while disability continues. Benefits begin following a waiting period, which is the period between the time you become disabled and the time your benefit payments begin. Waiting periods can range from one week to a year or even two years. In general, the longer the waiting period the lower the cost of the policy.
If you purchase an individual disability income insurance policy for yourself, and pay premiums with after-tax dollars, the benefits you receive are generally tax free.
Two features that may be part of disability income policies are important for you to understand: noncancelable protection and guaranteed renewable protection. An insurer cannot cancel or refuse to renew either type of policy, as long as premiums (i.e., price of insurance protection for a specified period) are paid on time. These features differ, though, in important ways.
•Noncancelable. The policy's premium can never be raised above the amount shown in the policy, and benefits may not be reduced—as long as premiums are paid on time.
•Guaranteed renewable. You have the right to renew the policy with the same benefits, but the insurer can increase your premiums— as long as they are increased for all other policyholders in the same class (i.e., having the same characteristics).
Initial premiums for guaranteed renewable policies may be lower than for noncancelable policies, but the guaranteed renewable premiums can go up over time. Less expensive policies that may not offer a noncancelable or guaranteed renewable option are sometimes available.
Riders on Individual Disability Insurance Policies
Most insurers offer several optional benefits (called riders) to enhance disability income coverage.
Common riders include:
Cost of Living Adjustments: COLA provides for an annual increase in benefits (generally after you have been disabled for a year), usually based on a Consumer Price Index or a predetermined percentage. This helps your benefits keep pace with inflation, and is particularly important if you are disabled for a long time.
Future Purchase Option: (Guaranteed Insurability Option). This rider allows you to purchase additional disability income insurance as your income increases, without providing proof of medical insurability. Even if you develop a condition that would normally prevent you from obtaining additional coverage after you purchase your original policy, you could still increase your benefits.
Residual Benefit: This pays you a portion of your monthly disability benefit if you have a drop in income due to a disability (e.g., if you are working part time). In most cases you need to satisfy a minimum percentage loss in earnings (e.g., a 20 percent loss) to qualify.
Social Security Rider: If you are disabled, these riders pay you additional benefits if you are not able to receive Social Security disability benefits because of the Social Security Administration's definition of disability. Usually, an individual disability policy with this rider will pay after the waiting period for the policy and during the five-month period (sometimes up to a year) while you are waiting for Social Security to kick in. If Social Security denies your claim, this rider will continue to pay benefits for the duration of the benefit period. Before purchasing a rider to your policy, ask yourself if you would be able to pay for the benefits provided by this rider out of your own pocket.