Introduction |  Purpose  | Request Quote | Glossary |  Links |

Purpose of Disability Income Insurance

Disability income insurance is designed to provide an individual with a stated amount of periodic income in the event they cannot work due to a disabling illness or accident.  Statistics prove that the probability of disability greatly exceeds the probability of death during an individual's working years.  The need for protection against the economic consequences of a loss of the principal wage earners income cannot be overemphasized and it is this need that disability income insurance fills.

Disability income policies providedcoverage for disabilities resulting either from accidents alone or from accidents and sickness.  Because sickness related disabilities represent only a small fraction of all disabilities, it is not economically feasible to issue sickness-only disability policies.  To obtain sickness income protection, one normally has to purchase accident income coverage as well.

Disability income policeis are available as individual plans and group plans. They also serve a very important function for businesses and business owners. 

Disability Income Benefits
The benefits paid under a disability income policy are in the form of monthly income payments.  Unlike life insurance, which insurers will issue for almost any amount the applicant applies and qualifies for, disability income insurance is characterized by benefit limits.  Insurers typically place a ceiling on the amount of disability income protection they will issue on any applicant, defined in terms of the insured's earnings.  And with few exceptions, this benefit ceiling is less than the insured's regular income.

Disability income benefits are based on the insured's earnings and are designed to replace lost income.  Insurers use two methods to determine the amount of benefits payable under their disability income policies.  The first method determines the benefit using a percentage of the insured's predisability earnings, and takes into account other sources of disability income.

For Example:  An individual earning $2,000 a month may be limited by Company A to a monthly benefit of 60 percent of income, or $1,200.  If that individual already has an existing disability income policy from Company X that provides for $400 in monthly income, the amount payable by Company A would be limited to $800 each month.

Some policies that use the percent of earnings formula provide a benefit that varies with the length of the disability.  For instance, the benefit amount may equal 100 percent of the insured's predisability earnings for the first month and then reduce the benefit amount to 70 percent thereafter.

The seocnd method used to establish disability benefits is the flat amount method.  Under this approach, the policy specifies a flat income benefit amount that will be paid if the insured becomes totally disabled.  Normally, this amount is payable regardless of any other income benefits the insured may receive. 

Note:  The percent of earnings approach is typically used in group disability income plans, The flat amount method is more common in individual plans.