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Can I insure 100% of my income with disability insurance?

Daniel Walker
Licensed Insurance Agent for 15 Years

UPDATED: Mar 19, 2020

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Can I Insure My Income With Disability InsuranceDisability insurance does not cover 100% of an individual’s income. Plans are available to cover between 65-80% of the policyholder’s gross income. The higher the benefit level paid, the more the policyholder will pay in premiums.

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Disability insurance coverage pays out a benefit if the insured is unable to work, due to sickness or as the result of an accident. Individual policies are available, or disability coverage may be part of a benefits plan offered by an employer.

How Disability Insurance Works

When this coverage is part of a group plan, all eligible employees are accepted by the plan without having to go through an underwriting process. Guaranteed acceptance means higher premium rates, but each person participating in the plan has some degree of protection.

When an accident occurs or the policyholder is ill and can’t work, he or she would make a claim for disability benefits. There may be a waiting period the person has to serve before the company will pay out any benefits. The longer the waiting period– the lower the premium amount that must be paid. If the application for benefits is accepted, the money will be paid until the insured is able to return to work, until age 65 or for life, depending on the plan chosen.

The policy language will be very quite specific about what constitutes a disability and if the policyholder doesn’t meet the standard set by the insurance company, then the claim for benefits will be denied. Many policies state that a person is disabled if the person is unable to perform the duties of his or her regular job or any other job. What this means is if the policyholder can’t continue to work at his or her previous job but is able to do some other type of work (even if it is at a lower pay scale), the policy will not pay out.

A disability insurance company may offer policies stating that it will pay out a benefit if the insured is unable to perform the duties of his or her regular job. To get this level of protection, a consumer will need to pay higher premium rates.

Disability Insurance and Business Owners

When a person is self-employed, he or she still needs to have a plan in place in case an accident or an injury interferes with their ability to make a living. A disability plan will not insure the entire amount of the individual’s business income. Instead, it will provide a benefit equal to a percentage of the company owner’s net income.

If the business owner wants to get coverage on the full amount of his or her business income, an overhead policy to pay for a portion of the expenses necessary to run the company, would need to be purchased. An entrepreneur who has employees may wish to consider this type of insurance coverage so that the company can be kept afloat while the owner is unable to work.

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Buying Disability Insurance

Companies offering disability coverage write their own policy language for their products. It’s important for consumers to consider their options carefully and make sure they understand what level of protection they are buying. This is not a case where choosing the option offering the lowest price is the best way to go. When buying disability coverage, the customer really does get what he or she pays for.

Each disability insurance provider is free to use its own criteria to rate the likelihood that an applicant will need to make a claim for benefits and set its rates accordingly. The type of work that an applicant is engaged in is one of the factors considered by the insurance company. Working in a type of job where the risk of injury is high means paying more for disability coverage.

The insurer will also want to know about the applicant’s hobbies to determine if the person is engaged in risky activities that may affect his or her likelihood of needing disability benefits. Having a pilot’s license, being a skydiver or going SCUBA diving are considered riskier leisure activities for insurance purposes, and choosing to do them will mean higher premiums or even having an application for individual disability coverage denied.

Disability insurance coverage will not pay a benefit equal to 100% of a policyholder’s income. If the person is an employee or self-employed, the benefit will be between 65-80% of income instead. The payout from the insurance company is made on a tax-free basis, which is a bonus for the recipient.

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