WHAT IS 'Disability-Income (DI) Insurance'

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

BREAKING DOWN 'Disability-Income (DI) Insurance'

DI insurance is designed to replace 45 to 65 percent of the insured’s gross income on a tax-free basis in the event illness prevents them from earning an income in their occupation. It is not a required purchase like homeowner’s insurance but usually is a prudent purchase. Although some disability insurance coverage often is provided by employers, the quality of coverage often leaves the disabled employee short of the needed protection.

DI insurance cost

Disability income insurance has a variety of factors that influence the final premium. Policy premiums generally range 1.5 to 3 percent of gross income. The older the applicant, the higher the premium. The minimum age for applying is 18 and the maximum age usually is 60. Unlike for life insurance, DI female rates are higher per unit of coverage than those for male applicants. Those who smoke can expect to pay as much as 25 percent more for the same protection as a non-smoker. Disability policies typically are issued with a specific monthly benefit amount, for example, $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. As benefit amounts increase, premiums rise accordingly. Most disability companies will not issue policies with benefit amounts of more than 60 percent of an individual's gross income.

Most insurance companies provide two-, three-, five- and 10-year benefit periods in DI policies. The longer the benefit period, the higher the cost. The waiting or elimination period before benefits are paid usually is 30, 60 or 90 days. Waiting periods of 180 and 365 days are also available. The cost per unit of coverage decreases as the waiting period increases. Most disability companies have several occupational classes into which each applicant is assigned. Higher paying occupations are in higher classifications and pay less per unit of coverage, and lower paying occupations classify lower and pay more. These classifications are based on the carrier’s claim experience for the job categories. Some companies offer policies that are self-contained where pricing is based on all benefit features of the policy. And they offer customized versions where benefit features are listed and priced separately so customers may add or delete features based on need or cost. Pre-existing health conditions may add 25 to 100 percent to the cost of the policy to insure the additional risk.

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