Understanding How Disability Insurance Protects Your Income

Disability Insurance

From cancer to nerve damage to back pain, there are a variety of medical conditions that could make you eligible to receive disability insurance benefits. While some people understand just how important having a disability insurance policy is, many don’t fully understand how it works.

If you’re thinking about getting a policy, you should do so now. But before you do, here are some tips to help you better understand how disability insurance protects your income.

Disability Benefits Cover Future Unearned Income

Disability insurance is not health insurance — it’s income insurance. When an illness or injury prohibits you from working, disability insurance benefits kick in. You can continue to collect a portion of your regular paycheck, usually up to 60%, for the length of your policy’s benefit period.

The benefit period refers to the amount of time that you choose to collect benefits. With an individual policy you can select your own benefit period, from as little as two years all the way up until you hit retirement age. The longer the benefit period, the more you’ll pay in monthly policy premiums.

What makes disability insurance so unique is that there are no limitations as to how you can spend the benefits. Unlike health insurance, which you can only use to pay for medical care, you can use disability benefits to pay for anything. Spend them on your monthly mortgage payments, your child’s tuition, or even a family vacation.

Disability insurance makes it possible for ill and injured individuals to earn a paycheck even when they aren’t physically able to work. Get it while you’re young and choose the longest benefit period you can afford and you could collect benefits for decades even if you cannot work.

The Definition of Disability Affects Eligibility

In order to collect disability benefits, you’ll need to prove eligibility, and that starts with meeting the definition of disability.

There are a variety of definitions of disability, including:

  • Own-occupation
  • Own-occupation, not working
  • Any occupation

With an own-occupation policy you’ll be eligible to collect benefits if an injury or illness prevents you from doing all, some, or part of your current job. To qualify to collect benefits under an any occupation policy, you must be unable to work in any job whatsoever.

You’ll need to provide your insurance company with medical records and proof that your physician says you cannot work. Once the insurance company approves your claim, you’ll have to wait out the policyelimination period before you can start receiving monthly payouts. Once you start receiving benefits, you’ll earn them for as long as you are unable to work or until the benefit period ends.

Benefits Can Be Tax-Free

Some people have disability insurance coverage as part of their employee benefits package, but those benefits usually count as taxable income.


Because before they’re either paid for by your employer or with pre-tax dollars from your paycheck.

But if you take out an individual policy and pay your monthly premiums with after-tax dollars, the benefits you’ll receive will be tax-free.

If you take the max coverage of 60% of your salary, those tax-free benefits could be nearly equivalent to your current take-home pay.

Added Benefits Are Available

Disability insurance policies often include built-in benefits that provide added financial protection for no additional cost.

For example, Ameritas offers the COBRA Premium Benefit. With this benefit, Ameritas will pay $1,000 per month towards your COBRA premium for up to 18 months. Check out thisreview of Ameritas disability insurance to learn more about other built-in benefits.

Insurance companies also offer riders, which are extra benefits that you can tack onto your policy. Adding riders will increase your monthly premium, but some are well worth the cost.

One such rider is the Student Loan Repayment rider. Should you become disabled while still paying back student loans, this rider will pay your monthly benefits AND cover your monthly loan payments.

Disability Benefits Provide Protection for Retirement

Disability benefits end when you reach retirement age, so it’s important to continue to plan for your retirement as if you were still working.

You can maximize your disability insurance benefits by investing a portion of them into an IRA or similar retirement account. Think about it this way:

If you were working you would contribute a % of your weekly pay into a 401k, so continue to invest that same % in an individual IRA account. This will prevent you from falling behind on your retirement savings and you’ll have more money available when you hit retirement age and your benefits come to an end.

In Conclusion

Getting a serious medical diagnosis or suffering an injury is stressful enough. Don’t let financial troubles add to your burden.

With individual disability insurance you can collect benefits to replace the paycheck you can no longer earn, and that can alleviate financial pressure so you can focus on recovering. Without it, you’re putting your finances and your health at even greater risk.

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