What is disability-income insurance?
Disability-income insurance is insurance that provides financial benefits to a policyholder in the event of sickness or injury that inhibits the ability to work. Disability-income insurance is meant as a substitute of no more than 80% of income on a tax-free basis should illness keep you from earning an income in your occupation. Some things that must be considered before choosing disability insurance include:
- a) whether there is a waiting period before income kicks in,
b) whether the policy covers short and long term disabilities, and
c) whether the policy covers disabilities resulting from accidents or illnesses.
Another source of disability insurance is the Social Security program. The Social Security Administration (SSA), which is responsible for retirement benefits, also administers disability benefits. Eligibility for SSA disability payments is based on being unable to perform any gainful employment and not the job that was being performed at the time the disability began. In other words, being a firefighter or a construction worker does not entitle one to higher disability benefits than people in other professions. Social Security disability payments are subject to federal income tax if your “combined income,” adjusted gross income plus any nontaxable interest income and half of your Social Security benefits, exceeds certain limits. To find out more about SSA disability payments, go to socialsecurity.gov.
For more, see Critical Illness Insurance: Get Paid If You Get Sick.
What to Look For
Different policies define “disability” differently. In other words, be sure that the policy covers the situations you want it to cover. If appropriate and warranted make sure that your policy cannot be cancelled and that renewals are guaranteed as long as you pay your full premiums on time, whether or not your health picture changes along the way. If a policy seems too expensive, you may want to consider one that offers lower premiums at younger ages and then increasing premiums as you get older.
Social Security Riders
If you are disabled, it will take a few months for your Social Security payments to arrive. You can purchase a “rider” to your disability policy that will provide you with income while you await your Social Security checks—or if you don’t qualify for the Social Security payments (for example, you don’t expect to be disabled for an entire year). Riders can be expensive, but may be worthwhile depending on your situation since many claims for Social Security disability benefits are initially
- Go to this website: LIFE, a non-profit organization for things to consider when deciding on a disability policy; or go to AARP’s website.
- Look for an insurer in your state for any type of insurance, using an online service from the Insurance Information Institute.
- Be sure that the insurance company offering the policy will be financially sound when, or if, it comes time to pay your claim. Use these services:
Moody’s Investors Services
Standard & Poor’s Insurance Ratings Service
For state insurance information, check www.naic.org/state_web_map.htm.