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Insurance offered through OnPay Insurance Agency, LLC (CA License #0L29422)
Updated: May 12, 2023
Individual disability insurance (DI) safeguards a person’s wages when a non-work-related illness or injury prevents them from working for a certain period of time. But this type of insurance (and the peace of mind it provides) is sometimes “lost in the shuffle” when planning for unexpected life events and the costs that come with them. For example, while many people buy insurance to protect their cars, homes, and health without batting an eye, income protection is often overlooked.
There’s no single reason why. For example, many workers believe that experiencing a disability is something that only older generations face, when in fact, data from the Social Security Administration shows that one in every four 20-year-olds experiences a disability before reaching retirement age. Moreover, some think workers’ compensation will protect their paychecks if they are disabled outside of work, when in fact, it only covers on-the-job incidents. And with so many providers on the market, finding one that meets your needs can take longer than finding a needle in a haystack.
To help you understand the ins and outs of individual disability income insurance, we’ll go over the wage protection it provides, who usually buys these policies, and some insights from OnPay’s Vice President of Insurance, Paul Foery, so you can make an informed decision when looking for a provider.
To start, an individual disability insurance income policy, also known as personal disability coverage, provides a portion of income replacement for people who are unable to earn a paycheck due to life events such as sickness or injury occurring outside of work. It is important to understand that the amount of income is calculated based on a percentage of the person’s total income, which means that the policyholder receives a portion of their wages (policies are not designed to cover lost income in full).
Having an individual disability income policy arguably protects your most important asset: the ability to earn a paycheck and cover your living expenses. “The number one asset that protects all the assets you count on is income,” explains Paul Foery, OnPay’s Vice President of Insurance and a licensed insurance professional with over 30 years of assisting small businesses with plans. “If you can’t work, and earn a paycheck, all of the essentials and things you count on, and spend money on, from day-to-day have the potential to go away.”
Let’s talk about who this type of insurance protects now that we’ve established what it’s for.
“The number one asset that protects all the assets you count on is income. If you can’t work, and earn a paycheck, all of the essentials and things you count on, and spend money on, from day-to-day have the potential to go away.”
— Paul Foery, OnPay's Vice President of Insurance
Simply put, as the policyholder, policy owner, or key executive receiving coverage, you’ll be eligible for partial income replacement if you’re unable to perform your job duties due to illness or injury that happens outside of work. In fact, these plans are designed to help if earning an income is not possible for an extended period of time, usually lasting up to SSNRA (social security normal retirement age).
The purpose is to provide a steady source of income so you can focus on your health, family, and obligations without having to worry about where your next paycheck is coming from. By extension, members of your household also benefit because any wages you receive can be used toward essentials such as:
Next, let’s cover some basics around group vs disability insurance for employers and employees.
Though they share some similarities, there are some differences to keep in mind.
One of the most significant differences between group and individual coverage is the application process. Again we spoke with Foery for insights into what the process of applying for individual coverage looks like.
“As part of the underwriting process, carriers will ask you to send your W-2 for the last two to three years to verify what your wages are; they won’t just take your word for it,” he says. “Remember that anyone can say they earn $50,000 in salary and $50,000 in commissions, and a carrier is likely willing to pay it out — but they will require proof of income.”
Let’s talk more about who generally takes a closer look at the income replacement that individual disability insurance provides.
Many different professionals purchase disability insurance, from business owners and executives to a company that wants to protect a key employee. Generally, DI can be beneficial for anyone who’s unsure they’ll be able to make ends meet should an unforeseen event prevent them from earning a paycheck. Even if an employee is on an existing group plan through their employer, purchasing additional coverage in the form of individual disability insurance is an option they can take advantage of.
If you’re on the fence about whether this type of coverage is worth the investment, it might be helpful to consider a few questions:
We’ve discussed who and what policies cover, so let’s talk more about the approximate amount of wage protection it provides.
An individual (personal) disability plan typically replaces income in the range of 50% to 70% of a policyholder’s income, if events such as illness or injury prevent a person from earning wages. This could be tax-free, depending on who is paying the premium.
Most — if not all — disability income insurance coverage has a waiting period the policy owner must satisfy before benefits are paid out. What does this mean? The policyholder needs to experience the disability for a certain period of time before making a claim to replace income. Depending on the policy, the waiting period ranges from 30 to 180 days.
While this has much to do with the carrier you choose (and how much you want to customize a policy), there are different features that you could add to your policy.
This depends on an individual’s budget and the amount of savings on hand, and what they can afford to dip into for living expenses. Though it depends on the insurance company (and many different variables), policies can cost upwards of $2,000 – $4,000 annually for a premium. As income replacement, the money alone could make the difference, especially if you experience a life event that prevents you from performing your job for an extended period.
Costs can also fluctuate on how quickly you need income replacement. Once more, we spoke with Foery for his take. “How much money can you get to bridge the gap? The shorter your waiting period the most costly your premium is going to be,” he explains. “But if you’re able to keep up with expenses for 30 to 180 days, it is going to lower your premium for the policy.”
“How much money can you get to bridge the gap? The shorter your waiting period the most costly your premium is going to be. But if you’re able to keep up with expenses for 30 to 180 days, it is going to lower your premium for the policy.”
— Paul Foery, OnPay's Vice President of Insurance
To see what income replacement could look like, let’s look at an example.
Again, each person’s situation (and policy) is different. The takeaway is that investing in a policy could make an enormous difference in terms of covering living expenses should a claim need to be made.
When doing your research, remember plans can be customized, and there are many factors to consider. Once more, we spoke to Foery about what to keep in mind. “The first thing you should know is what type of experience does the broker have writing these types of policies? You want to know how how they have been doing this,” he explains. “Plans can get complicated, with many variables, because there’s so much more at stake, someone writing their very first policy is a bit of a risk.”
The last thing you or your broker wants is a contract that’s written which is not enough to cover a disability if it should come to that.
In addition, Foery says to keep these points in mind when shopping around:
Individual income policies can supplement your income if an unexpected life event causes you to miss work and your ability to earn a paycheck. Because there are various factors to consider, it could be a good idea to speak with an agent specializing in individual insurance coverage or schedule time with your broker to find out if they can suggest a policy that makes the most sense for your needs.
Best of luck as you research different vendors on the marketplace, and if you have any questions, OnPay’s team of experts is here to help.