Disability income insurance

What is disability income insurance?

Disability income insurance is a supplemental policy designed to protect policyholders if they are unable to work due to an illness or accident. Disability income benefits offer a monthly income so the policyholder can cover regular expenses while he or she is unable to work.

Deeper definition

One in four employees will experience long-term disability at some point, and it can have devastating consequences for a family’s finances.

There are three types of disability income insurance: employer-provided insurance, private policies and government plans such as Social Security disability and state disability plans.

There are also long-term disability policies and short-term disability policies. Short-term disability policies usually cover the first few weeks or months that the policyholder can’t work but expire after a specified time. Short-term policies are usually only available through employers.

Long-term policies provide coverage after a specified period of disability but lasts much longer than short-term policies. Some employers offer long-term policies, but they also can be purchased individually. Long-term disability policies can last years and can be tailored to meet your specific needs. The ideal long-term policy will protect you until you’re 67 years old.

Long-term disability insurance rates are based on demographics such as your gender, age and occupation. The rate also is determined by the percentage of income the policyholder wants to cover.

Generally, these policies cost from 1 percent to 3 percent of the policyholder’s salary. Policies purchased through a group plan, such as an employer’s plan, can be less expensive.

Disability income insurance example

Suppose Greg works as a software developer and makes $100,000 per year. He purchases a long-term disability policy, which will pay him 80 percent of his salary if he becomes disabled. The policy costs $150 per month.

Two years later, Greg suffers a head injury in a skiing accident. His recovery is expected to take a long time, and he is not able to immediately go back to work. His long-term disability insurance policy begins paying him 80 percent of his income four weeks after he is unable to work.

After his long-term policy begins paying him, he can count on this income to cover his expenses until he’s ready to return to work.