Disability Income Insurance Basics

To give you a better picture of what Disability Insurance is and why you might need it, we sat down with a brightpeak financial pro to give you the scoop. 

Disability Income Insurance is one of the least well-known types of insurance, but it is also one of the most important. To give you a better picture of what Disability Income Insurance is and why you might need it, we sat down with a brightpeak financial pro to give you the scoop. 

Q: What is Disability Income Insurance?

A: Disability income insurance provides you with a “paycheck” if you become sick or injured and unable to work for a period of time. In exchange, you make a monthly payment (called a premium). This type of insurance is designed to replace 45% – 60% of your income so that you can stay financially afloat while you recover. You could think of it as another type of rainy day fund.

Q: Who needs Disability Income Insurance coverage?

A: Anyone who depends on their paycheck or their ability to work should consider disability income insurance. Could you and your family get by without the money you bring home each month? If not, Disability Income Insurance is a good option. Even those without an income (like a stay-at-home parent) may want to consider Disability Income Insurance to help offset the costs of hiring outside help for cooking, cleaning, driving and taking care of kids.

Q: Will I qualify for coverage?

A: During the application process (also called underwriting), insurers ask you questions to develop what we call a “risk profile.” This profile is based on your health history, age, driving record and any activities you participate in that could be hazardous. The process is similar to that of any other type of insurance—automotive insurance, for example, requires information about your driving record, previous accident history, your credit report, etc. After creating your risk profile, insurance companies determine if they can cover you and how much your premium will be.

Q: How much coverage do I need?

A: Adequate coverage would replace 50% to 80% of your monthly income, however, it’s probably a good idea to cover as much of your after-tax pay as you can afford. Oftentimes, people think that their employer-provided coverage will be sufficient if they become disabled, but that’s not always the case. Most employer policies only cover you for 50-60% of your base salary and that number may be subject to taxes, leaving you with a lot less than you anticipated. Could you afford to take a 50% pay-cut while sick or injured? Buying an individual Disability Income Insurance policy (not with your employer) can help you fill in the gaps. And, because you pay the premiums with after-tax dollars, the benefits you receive are tax free. You can also find out how much coverage you need by using a disability insurance coverage calculator.

Q: Is disability insurance expensive?

A: Most people are surprised at how affordable Disability Income Insurance actually is. You can see for yourself how much it could cost by getting an instant quote. You should also weigh the cost against what you gain from your protection. Think about the potential impact a disability could have on your lifestyle and your ability to earn a living. After only a couple months you could lose an apartment or struggle to afford the basic necessities, like food for your family. Disability Income Insurance protects your future from the unexpected for only a small monthly payment.

Q: When can I file a claim?

A: You are likely eligible to receive disability benefits if an illness or injury leaves you unable to perform the basic tasks your occupation requires.  To file your claim, give brightpeak a call and we’ll send you a couple of forms to complete. Once you fill out the forms and provide verification from your doctor, return the forms to us. If you’re approved, you’re set.

Q: What is the “waiting period” on my policy?

A: The timing of your benefits payments depends on the length of your “waiting period.” With a brightpeak policy, you can choose a 30-, 60-, 90- or 180-day waiting period. This is the window of time between when you become disabled and when you start receiving payments. We generally recommend 90 days as a good balance of cost and coverage (the longer your waiting period, the cheaper your premium). Long-term disability insurance is a good idea to supplement short-term policies provided by many employers. A typical short-term employer benefit generally only  lasts between three and six months.

Q: How long can I receive monthly benefits for?

A: This one depends on the length of your “benefit period.” Your benefit period is the longest amount of time you could receive benefits. During this period, you have to remain disabled according to the policy definition of disability to continue receiving benefits. The benefit period could be two years, five years, or could cover you until age 67.

Q: How long of a benefit period should I choose?

A: A benefit period of two years will cover you for most disabilities, especially if you’re young. It’s also the least expensive option. A period of five years will protect you when you have a disability that requires a longer recovery period. A five year benefit could also give you the necessary time to retrain for a new occupation if needed. For example, if your job has a physical component that your disability does not allow you to complete, a five year benefit period could be helpful while you learn new skills or go back to school. Finally, having a benefit period of up to age 67 could protect you from just about anything. You could continue receiving benefits until you begin to withdraw social security and retirement benefits. The longer the benefit period is, the higher the premium will be.

Q: What sorts of injuries and illnesses does Disability Income Insurance cover?

A: This largely depends on your policy (tip: read the fine print and ask questions!). Disability Income Insurance typically covers varieties of injuries and illnesses that may affect how you work—things like carpel tunnel syndrome or a back injury from a car accident. Oftentimes, people skip out on disability income insurance because they are certain they will never be faced with a disability. But it can happen to anyone. Consider these statistics:

  • Just over 1 in 4 of today’s 20 year-olds will become disabled before they retire.¹
  • Accidents are NOT usually the culprit. Back injuries, cancer, heart disease and other illnesses cause the majority of long-term absences.¹
  • The duration of the average long-term disability claim is 34.6 months.¹

Are you prepared if it happens to you? If you’re like most Americans you probably don’t have enough emergency savings to last that long. Disability Income Insurance can be that emergency financial assistance when the unexpected happens.


1 http://www.disabilitycanhappen.org/chances_disability/