Disability Income (DI) Insurance

What Is Disability Income (DI) Insurance?

Disability income (DI) insurance provides supplementary income in the event an illness or accident results in a disability that prevents the insured from working at their regular employment. Benefits are usually paid monthly so the insured can maintain a comparable standard of living and pay recurring expenses.

Understanding Disability-Income (DI) Insurance

Disability income (DI) insurance is designed to replace between 45% and 65% of the insured’s gross income on a tax-free basis. Some policies include bonuses and commissions as income. The benefits are tax-free because the policyholder used after-tax dollars to pay premiums. The policy pays a benefit in the event illness or injury prevents the policyholder from earning their usual income in their occupation. 

Although some employer-offered plans and workers' compensation can provide help during a disability, the quality and scope of the coverage may leave the disabled employee short of the protection they require. Many employer-offered plans are part of a suite of coverage and may not pay to the levels an employee needs to meet their expenses. Also, workers' compensation only covers injuries as a result of employment.

Self-employed individuals and small business owners must go it alone when it comes to disability income. Even if an injury is work-related, an independent business owner may not claim workers' compensation for themselves. 

The Cost of Disability Income Insurance

Disability income insurance has a variety of factors that influence the final premium. Policy premiums generally range between 1% and 3% of the gross income. Insurance underwriters also consider age during the underwriting process. The minimum age for applicants is 18 years, and the maximum age is usually 60. Unlike life insurance, DI rates for women are higher per unit of coverage than those for male applicants.

According to claims data, insurers have historically paid more and higher dollar amount claims for women than men and during an earlier period of life. This may be attributed to pregnancy and childbirth and higher rates of depression and autoimmune disorders. Also, smokers can expect to pay as much as 25% more for the same protection as a non-smoker because of the higher incidence of smoking-related illnesses.

When determining premiums, providers will place applicants into career and income classifications. The basis of these classifications is on the carrier’s claim experience for these job categories and incomes. The classification with the lowest risk will pay less.

Disability Income Insurance Waiting Period

Typically, disability income insurance policies contain a specific monthly benefit amount (e.g., $3,000 a month). Unless stated in the policy language, DI policies do not coordinate with Social Security benefits but pay in addition to it. And, of course, as the monthly benefit amounts increases, higher premiums are assessed. Most companies will not issue a policy with benefits that amount to more than 60% of an individual's gross income.

Most insurance companies provide plans that carry a maximum benefit period of two, three, five, or 10 years. Once again, the price increases to purchase an extended benefit period. 

Disability Income insurance policies have a waiting or elimination period before being able to receive benefit payments. This period is usually 30-days from the date of coverage and may vary by provider and policy. Another critical consideration for disability income policies is that the benefit payments do not begin immediately after the filing of an injury or illness claim. Again, this will vary by provider and policy type, but most will require a waiting period of 30 to 45 days before the first benefit payment processes.