What Are Pre-Disability Earnings?

Pre-disability earnings are the amount of qualifying income that a disability insurance policyholder was earning before an injury. Pre-disability earnings are used to calculate how much disability income a policyholder will qualify for in the case of an injury. An injury may prevent the policyholder from working at all or prevent the policyholder from working full time.

Key Takeaways:

  • Pre-disability earnings are used to set a wage baseline for calculating the income that a policyholder will receive after an injury.
  • Pre-disability earnings are a percentage of the policyholder's income on the last full day of active work.
  • Pre-disability earnings do not include bonuses, commissions, overtime pay, or employer contributions to a retirement plan.

Understanding Pre-Disability Earnings

Individuals buy disability income insurance so that they have some level of income in the event of an injury. Without disability income insurance, a worker may rely on Social Security Disability Income (SSDI) or have no income source at all. This can be disastrous to families, particularly if the person injured is the sole income earner in the family. The typical percentage range for most disability policies is between 60 and 67% of the claimant’s pre-disability income.

Determining a Wage Baseline

Pre-disability earnings are the baseline used to calculate disability benefits. The calculation uses policyholder earnings on their last full day of active work, although some policies may use average earnings over a period. Pre-disability earnings do not include bonuses, commission, overtime pay, or the employer’s contributions to a retirement plan. They do include personal contributions to a retirement plan and regular salary.

The amount of disability income that a policyholder is eligible for may be set as a monthly maximum or as a percentage of pre-disability earnings.

Disability policies often allow an individual to also purchase a residual benefit, which allows the policyholder to receive partial benefits if they return to work part-time. The amount of residual benefit depends on the pre-disability income less any income that the policyholder can bring in through part-time work.

Several factors influence the final premium for disability income insurance. Policy premiums generally range from 1.5 to 3% of gross income. The older the applicant, the higher the premium. The minimum age for applying is 18, and the maximum age is usually 60. Unlike life insurance, the rates for disability insurance for females is higher per unit of coverage than the rates for male applicants. Smokers can expect to pay more, as can those in poor health.

Example of Pre-Disability Earnings

A policy indicates that the benefit is set at 75% of pre-disability earnings. This means that a policyholder making $80,000 a year and no longer able to work can receive a monthly benefit of $5,000 (75% * $80,000 / 12).

When looking for a disability policy, it's sensible to request that your benefit in the event of injury be close to your full take-home pay before you were disabled. The average recommended long-term disability insurance benefit should be between 60% and 80% of your after-tax salary.