Disability Insurance Explained

Disability insurance in many cases is confused with critical illness insurance. Both of these types of insurance provide payments in cases involving an illness or disability, however the way payments are paid differ. Disability insurance provides individuals with a monthly income in the event an individual is not able to work as a result of a serious injury or illness. Critical illness provides an insurance payment in a lump-sum tax free amount following the diagnosis of one of the illnesses covered by the critical illness policy. In many cases, disability insurance would provide payments that critical illness insurance would not have supported. 

Individuals that work for large employers including many financial institutions, government agencies, automobile manufacturers, school boards and dozens of others in most cases will have some form of long term disability insurance in place. The type of coverage will differ from employer to employer and in many cases the coverage is somewhat limited. 

Some disability policies include coverage for what is known as “own occupation”, while other policies provide coverage for “any occupation”. Own occupation coverage refers to an individual not being able to work at their regular job, and is viewed as better coverage.

The amount of disability coverage required is based on an individual’s personal circumstances including whether they are married or not, have a mortgage, car loans, children and other expenses. In some cases only 40% coverage may be needed, while in other cases 60% or 70% may be required. In essence, individuals should have coverage that provides for their living expenses in the event of a disability.

Many disability plans may cap the amount of benefits payable. It is important to also note that disability coverage obtained by an individual and paid for by an individual is generally tax free if payment benefits are made. Most payouts from employer or corporate sponsored plans are taxable.

Disability Insurance Features:

  • Provides regular pay if an individual is not able to work because of a disability
  • Regular payments are provided, unlike lump sum payments for critical illness
  • Payments can be either taxable or non-taxable, depending on how the coverage is obtained and paid for
  • Generally, the premiums are less expensive than critical illness insurance
  • Maximum benefit payment periods most likely will exist
  • Provides coverage against any illness if it prevents an individual from working
  • Individuals can collect from both disability policies and critical illness coverage at the same time for the same illness or disability
  • Critical illness insurance may be more suitable in many cases, including for non-income earners such as homemakers or stay at home parents

Accidents and illnesses occur in life and can happen at any time to any person. The risk of disability is real, and on average one in three people will be disable for a period of 90 days or longer, at least once prior to the age of 65. 

Disability insurance from insurance companies in most cases is cheaper than critical illness insurance, however it is different. Individuals should consult with experienced life insurance agents for information on disability insurance. Every individual and family has unique circumstances and proper planning is imperative. Most people will find that there is a need for disability insurance coverage to some degree.

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