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Brad Rempe, CFP®, AIF®

An unforeseen disability due to injury or illness that would prevent you from earning an income is an event that, if left unprotected, can have a catastrophic impact on your financial health.  If you are unable to earn an income, meeting household expenses either in the short- or long-term could force you to liquidate assets set aside for other purposes, such as your retirement or your child’s education savings.

The purpose of disability insurance is to provide a benefit that would replace some or all of your income, if such an event were to occur.  Optimally, the benefit would pay for not only current living expenses but also additional savings requirements (retirement, education, etc.) necessary to fund your future living expenses when disability benefits stop.  Short-term policies may pay for one to five years, while long-term policies typically pay for a minimum time-period, to your age 65, or in some cases even longer.

Understand Your Policy

Because disability policy terms vary by issuing company, it is important to understand all aspects of your policy.  Its’ design will determine under what conditions you are eligible to receive benefits, the benefit amount, and time period during which the benefit will be received.

How the policy defines disability is one of the most important elements of the coverage, as this will determine when you are eligible to receive benefits.  The most favorable definition is built around the concept of “own occupation,” which would provide benefits in the event you are unable to perform the duties of your own regular occupation, e.g. general surgery.  The least favorable definition is “any occupation” which would only pay benefits if you are completely disabled and unable to work in any occupation, regardless of your education or training.

The amount of coverage available is generally limited to approximately two-thirds of your income and may also specify a maximum dollar amount, for example $10,000 – $15,000 per month.  The taxation of benefits is determined by how policy premiums are paid.  If premium payments are made with pre-tax dollars, any benefits received would be subject to income tax.  If premiums are paid with after-tax dollars, benefits would not be taxed.

Other important provisions of your policy include the elimination or waiting period, renewability terms, and other available features or riders to the policy (non-cancelable, residual benefits, COLA, etc.).  Another significant feature to look for is the possible integration of benefits with other income sources, such as other disability policies or Social Security.


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