Disability Insurance
Disability insurance provides income replacement when a policyholder cannot work due to illness or injury, typically paying 60-70% of pre-disability income after an elimination period.
🎬 Video Explanation
Exam Tip
Own occupation = best definition. 60-70% of income typical. Longer elimination period = lower premium. Individual = tax-free benefits!
What is Disability Insurance?
Disability insurance replaces a portion of your income if you become unable to work due to illness or injury. It's often called "income protection insurance" because it protects your most valuable asset—your ability to earn income.
Types of Disability Insurance
| Type | Source | Features |
|---|---|---|
| Short-Term (STD) | Employer | 3-6 months coverage |
| Long-Term (LTD) | Employer/Individual | Years or to age 65 |
| Social Security (SSDI) | Government | Strict definition, lengthy process |
| Individual | Private purchase | Portable, customizable |
Definitions of Disability
| Definition | Meaning | Typical Use |
|---|---|---|
| Own Occupation | Can't do your specific job | More expensive, better protection |
| Any Occupation | Can't do any job you're suited for | Less expensive, stricter |
| Modified Own Occ | Own occ for 2 years, then any | Common compromise |
Key Policy Features
| Feature | Description |
|---|---|
| Benefit Amount | Usually 60-70% of income |
| Elimination Period | Waiting period before benefits start |
| Benefit Period | How long benefits last |
| Definition | Own occupation vs. any occupation |
Elimination Period Options
| Period | Premium Impact | Best For |
|---|---|---|
| 30 days | Highest premium | Need income quickly |
| 60 days | Moderate | Balanced approach |
| 90 days | Lower premium | Have savings cushion |
| 180 days | Lowest premium | Significant reserves |
Benefit Period Options
| Period | Coverage |
|---|---|
| 2 years | Short-term coverage |
| 5 years | Moderate protection |
| To age 65 | Full career protection |
| Lifetime | Rare, expensive |
Important Riders
| Rider | Benefit |
|---|---|
| COLA | Benefits increase with inflation |
| Residual/Partial | Benefits for partial disability |
| Future Increase | Increase coverage without new underwriting |
| Own Occupation | Maintains favorable definition |
| Waiver of Premium | No premiums during disability |
Tax Treatment
| Policy Type | Premium Tax | Benefit Tax |
|---|---|---|
| Employer-Paid | Tax-free to employee | Taxable income |
| Employee-Paid | After-tax dollars | Tax-free |
| Individual | After-tax dollars | Tax-free |
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Elimination Period
The elimination period (also called waiting period) is the time between when a disability or long-term care need begins and when insurance benefits start being paid.
Waiver of Premium Rider
A waiver-of-premium rider waives specified policy premiums when the covered person satisfies the rider's disability and other conditions. The covered person, waiting period, ages and duration depend on the contract.
Morbidity
Morbidity refers to the incidence of illness or disease within a population, used by insurance companies to predict the likelihood of disability claims and to calculate health and disability insurance premiums.
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