Introduction to Disability Income Insurance

Most working Americans’ greatest assets are not their homes, nor their pensions, nor even their health and fitness, it is their human capital; their ability to work and produce an income over their lifetimes. When family breadwinners die (prematurely), their families are left to fend for themselves without the breadwinners’ financial support, unless of course, the families have life insurance policies on the lives of the breadwinners that will pay death benefits sufficient to replace the lost incomes.

As bad as an early death of a breadwinner may be to a family, it actually can get much worse, at least in financial terms. When breadwinners suffer serious long-term or permanent disabilities, their families not only lose their breadwinners’ income streams, but also, in contrast with when the breadwinners’ die, they continue to incur the direct and indirect costs of feeding, clothing, housing, and caring for (which often involves additional uninsured medical expense) the disabled breadwinner. Although the problem is less severe, even single workers must worry about how they will support themselves in the event they suffer a serious disability. Basically, disability is double-whammy risk that has led some in the insurance industry to describe such serious long-term or permanent disabilities as a living death.

Disability Income (DI) insurance is living death insurance designed to provide benefit payments (salary replacement) when the insured individual is unable to work due to a disability. Disability may result from either an injury or an illness. DI policies have an elimination period, or waiting period, until benefits commence after the insured becomes disabled. The waiting period is often ninety days, but policyowners usually can elect shorter or longer waiting periods with corresponding changes to premium charges. Insurers usually limit the benefit payments to an amount less than 100 percent of the individual’s salary, typically about 60 to 65 percent of income.

Individuals may acquire their disability income benefits through a group insurance plan provided by their employer or they may purchase it as an individual policy. Although disability income policies offered by different insurers have similarities, they also differ in substantial ways from one policy to the next. Disability income policies are contracts and the provisions within may vary. Before purchasing a disability income policy, the potential policyowner should carefully review and understand the policy’s provisions.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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