Disability Income Insurance protects your income from every source by replacing a percentage of your gross earnings (generally on a tax-free basis) should a sickness, illness, or injury prevent you from earning an income.
Your income is your most valuable asset. Protecting your income allows you to continue to enjoy what it pays for your home, your cars, your food, college, and vacations.
Policies generally provide replacement of 50% to 70% of income. The length of time for which you may receive benefits can depend on whether or not the accident or illness caused the disability. Monthly benefits are payable for a fixed period set forth in the policy.
Two features that may be part of disability income policies are important for you to understand: (1) non-cancelable protection, and (2) guaranteed renewable protection. An insurer cannot cancel or refuse to renew either type of policy as long as premiums (i.e., price of insurance protection for a specified period) are paid on time. These features differ, though, in important ways.
- Non-cancelable. The policy's premium can never be raised above the amount shown in the policy, and benefits may not be reduced as long as premiums are paid on time.
- Guaranteed Renewable. You have the right to renew the policy with the same benefits, but the insurer can increase your premiums—as long as they are increased for all other policyholders in the same class (i.e., policyholders who have the same characteristics as you have).
Riders On Individual Disability Insurance Policies
Most insurers offer several optional benefits (called riders) to enhance disability income coverage. Common riders include:
- Cost of Living Adjustments. COLA provides for an annual increase in benefits (generally after you have been disabled for a year), usually based on a Consumer Price Index or a predetermined percentage. This helps your benefits keep pace with inflation and is particularly important if you are disabled for a long time.
- Future Purchase Option (Guaranteed Insurability Option). This rider allows you to purchase additional disability income insurance as your income increases without providing proof of medical insurability. Even if you develop a condition that would normally prevent you from obtaining additional coverage after you purchase your original policy, you could still increase your benefits.
- Residual Benefit. This pays you a portion of your monthly disability benefit if you have a drop in income due to a disability (e.g., if you are working part time). In most cases you need to satisfy a minimum percentage loss in earnings (e.g., a 20% loss) to qualify.
- Social Security Rider. If you are disabled, these riders pay you additional benefits if you are not able to receive Social Security disability benefits because of the Social Security Administration's definition of disability. Usually, an individual disability policy with this rider will pay after the waiting period for the policy and during the five-month period (sometimes up to a year) while you are waiting for Social Security payment to begin. If Social Security denies your claim, this rider will continue to pay benefits for the duration of the benefit period. Before purchasing a rider to your policy, ask yourself if you would be able to pay for the benefits provided by this rider out of your own pocket. If not, this rider may be invaluable to you.
You need a personal insurance agent to sort it all out! Covington Insurance Agency is an independent insurance agency dedicated to finding you the comprehensive insurance coverage you need at a competitive price.
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