Disability Income
Purpose
MR. WATSON: Disability income insurance is designed to pay you a percentage of your income should you become disabled. Protects against "Economic Death".
MR. WATSON: Disability income policies protects you in the event of you becoming disabled due to an accident or sickness, or to accidents alone.
MR. WATSON: You cannot buy a disability policy that pays you only as a result of a sickness. If you want sickness protection, you must buy accident protection along with it. Here's why. If you were to become disabled a year from now, how do you think that happened? Due to a disability resulting from a sickness or from an accident?
ALL: Accident.
MR. WATSON: Generally. So insurance companies have found that it's not economically feasible to sell a disability policy only due to sickness. People won't buy em. Does that make sense?
ALL: Yes.
MR. WATSON: So if you want the sickness protection, you have to buy it along with the accident protection as well.
Occupational vs non-occupational coverage
- Occupational - on the the job or off the job protection
- Non-Occupational - off the job protection only
MR. WATSON: The insured's occupation is extremely important, as some jobs are much more dangerous than others. Maybe your job has Worker's Comp. To make the premium more affordable, you might get a nonoccupational disability policy. So it would only cover you if you got disabled doing something when you weren't at work. If you got disabled at work you would hope the worker's comp. would pay. But you do it because it's so much cheaper, does that make sense?
ALL: Yes.
MR. WATSON: A policy with an occupational benefit would obviously pay if you became disabled from something that happened on the job or off the job.
Benefits
- Individual benefits are tax free
- Premiums are NOT tax deductible
- Benefits must be paid at least monthly
MR. WATSON: Disability benefits are tax-free, therefore, you cannot tax-deduct the premiums. Also, the companies have a limit on how much of a benefit you can buy. For our purposes, we're just going to say you can have no more than 60 percent of your income. So if you made $100,000, you could buy up to $5,000 per month of disability insurance, 60 percent.
MR. WATSON: Insurance companies have two different methods of issuing disability policies. The amount you will receive.
- Number 1. A percentage of your pre-disability earnings, generally found in "group". Stated like this: We will pay you 100% of your pre-disability salary for short term (maybe six months) or 60% for long term. Normally used for group disability. This takes into account other sources of disability income.
- Number 2, The Flat amount method, more common in individual policies. You buy a flat dollar amount. Doesn't change over time, unless you buy more. Like stated earlier, $5000 per month.
MR. WATSON: So 60 percent - can we say generally that would be enough?
WOMAN: No, it's not. I was on disability with 60 percent. No, it's not enough. You still need clothes, even if you don't go to work.
MR. WATSON: I hear that! Even so, the company puts a limit on the amount.
MR. WATSON: If you have a disability policy for 60 percent from this company and one for 60 percent from another company, and you become disabled, do you think you will get 120 percent? No. They will coordinate the benefits, basically, and each pays their pro rata share. Company A would pay 30% & Company B would pay 30%. Does that make sense?
ALL: Um-hmm.