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Disability Insurance 101

How would you pay your bills if you were seriously sick or injured and couldn’t go to work? If you don’t have adequate Savings in place hopefully you have disability income insurance. Disability insurance is designed to replace a portion of lost income due to ill-health. The need for this protection will depend on what benefits are already available from other sources. This type of insurance (if not offered by your employer) is available through private insurance companies as well as Social Security.

Social security disability income insurance provides benefits that help replace the lost income of eligible disabled workers. This insurance provides eligible workers and their dependents with income during a period of disability expected to last at least 12 months or result in death. There is a 5-month waiting period after which benefits begin, and the disability must be considered “total” as defined by the Social Security Administration. Simply put, recipients must not be able to engage in any substantial, gainful activity. If they can do any work for pay, they will likely be ineligible for benefits.

Insurance carriers typically use two definitions of disability:

Own occupation (“own occ”) – means a disability prevents a worker from engaging in typical duties in his/her particular field of employment. Here’s an example – assume a surgeon loses a hand in an accident and can no longer perform surgery. Under the “own occupation” definition, they would be considered disabled. Now assume the surgeon decides to become a medical professor. Even though they are working and being paid as a professor, they would still be considered “disabled” as a surgeon, and would continue to collect disability benefits.

Any occupation (“any occ”) – means the insured can only receive disability benefits if they are unable to perform work-related duties for any occupation. If we use the same surgeon example, they would not be entitled to disability benefits if they began working as a professor under an “any occ” definition policy.

From a worker’s point of view, an own occupation policy would be more advantageous should a disability occur. However, own occupation policies are more expensive than any occupation policies and typically harder to medically qualify for.

When trying to determine the amount of disability income needed you can utilize a simple formula:

Current monthly after tax income

Less: social security benefits (estimate); employer-provided disability; existing private disability insurance; retirement plan disability benefits; waived life insurance premiums

Equals: Total monthly need

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