Individual disability insurance

Employer coverage is helpful, but it's rarely enough by itself. This makes individual disability insurance a must-have.
Read Time
12 mins

Reliability. It's the most fundamental component of disability insurance. Because what good is your coverage if it's not there when you actually need it?

In this comprehensive guide, we cover the importance of disability insurance for individuals and how it makes up for the shortcomings of employer-sponsored group coverage. This includes:

Read on to learn more.

What is individual disability insurance?

Individual disability insurance protects you and your source of income from injury and illness. This type of income protection is also commonly referred to as private disability insurance and personal disability insurance.

You are the only one insured, so you own the policy and you pay the full premium amount. This also means there is more risk involved, which is why you'll have to go through underwriting to qualify for coverage. General speaking, individual policies also cost more than comparable group plans.

As you can imagine, individual disability insurance differs from group disability insurance on more than just cost. To be clear, group coverage is when a large group of people, such as employees of a company, join the same plan. Typically, group members are automatically enrolled in the insurance plan if they choose. Members may pay all, some or none of the premium. The group sponsor will then pay whatever the member doesn’t.

Many people rely solely on group disability insurance offered through an employer or membership organization. One of the disadvantages of group coverage is that it’s possible to lose it at some point. On the other hand, buying your own individual disability insurance policy ensures that you will continue have coverage if you switch jobs or your employers drops the plan.

Who can get individual disability insurance?

Would your income be adversely affected by an injury, illness or chronic condition were to prevent you from working? If so, you should strongly consider putting an individual plan in place.

Frankly, individual disability insurance is available to just about everyone who earns a steady paycheck. You shouldn't have any issues getting covered as long as:

  • You are in reasonably good health.
  • You can afford to pay the monthly premiums.
  • You do not pose a serious risk of filing a disability claim.

Of course, there are a few scenarios where you may be denied coverage. For example, retirees who are not working typically do not qualify for disability insurance. (There's no source of income to insure!) Furthermore, insurance carriers may disqualify applicants who pose too much risk. This often includes individuals with serious health problems.

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Why do I need an individual disability insurance policy?

Individual disability insurance coverage is highly recommended for most people who work for a living. (And no, not just because insurance companies say so!)

Did you know members of the American workforce have a one in four of experiencing a disabling event that prevents you from working before you retire? In other words, you are more likely to miss three months of work due to injury or illness than you are to die before reaching retirement age.

During any period of disability where you are unable to work, you will lose income until you recover. In the meantime, your individual disability insurance coverage will help replace that lost income.

While many people rely solely on group disability insurance, it rarely provides sufficient benefits (especially for high-income earners). Group policies only offer basic benefits with few optional features.

Furthermore, group coverage is contingent on being part of the group sponsoring the plan. If that changes, you lose your coverage. There is also an annual renewal process for group plans. Upon these reviews, there is no guarantee the plan will be renewed.

On the flip-side, you own an individual policy for as long as you pay the premium. Individual plans are also portable, which means you don’t lose coverage by changing jobs or dropping your group membership.

Another advantage of individual disability insurance is that it can help cover income from commissions, bonuses and other incentive pay that traditional long-term disability plans may not cover. When determining your benefit amount, an individual disability insurance policy will take into consideration income above your normal salary.

Individual disability insurance can also supplement your existing group coverage. It can fill in the gap between that coverage and the amount you need to survive financially if you become disabled.

What features are essential to an individual disability policy?

Individual disability insurance policies often include optional features that can enhance your coverage. However, there are also features that simply add to your cost without providing much value. For starters, it is typically recommended that you include the following three features in your policy.

Non-cancelable. This means the insurer cannot change any part of the policy, including the premium amount, or cancel the policy for any reason.

Own-occupation provision. This definition of disability states that a policy will pay benefits if an injury prevents you from working in your given profession, even if you’re well enough to earn income doing other types of work. It is especially vital for high-income earners like physicians.

90-day elimination period. This is the period of time a policyholder must wait for benefits to be paid after becoming disabled. You should opt for a policy that begins paying at least within 90 days of a disability occurring. (It's typically the most cost-effective option.)

Common riders to consider adding to your policy

Individual disability insurance policies often include optional features called riders that can be added to enhance coverage. Riders help customize a policy to fit your needs and preferences. Keep in mind that riders typically add to the cost of your policy.

Here are the most common riders people consider adding:

A residual disability rider provides benefits if you are able to perform some, but not all, of your job following a disability. It also applies if you have to work less because of your disability. Benefits are typically calculated as a percentage of your loss of earnings or of what you would receive if you were unable to work.

A future increase rider enables you to increase your coverage amount at designated future dates. This may occur at certain ages, after major life events, if your income increases or if you lose group coverage. You won’t have to go through underwriting to increase your benefits.

A cost-of-living adjustment will increase your benefit amount to offset the impact of inflation. If you’re disabled and receiving policy benefits, your amount will increase each year that you are disabled.

A catastrophic disability rider can help pay for care needed due to an extreme injury or illness. This can apply if you suffer a complete loss of one of your senses:

  • Speech.
  • Hearing in both ears.
  • Sight in both eyes.
  • Use of both hands.
  • Use of both feet.
  • Use of one hand and one foot.

Catastrophic disability can also be defined as being unable to perform at least two of the six activities of daily living without assistance. These include bathing, dressing, eating, using the restroom, continence and transferring.

What isn't covered by an individual disability insurance policy?

No matter how much you trick out your individual disability insurance policy, it will likely include coverage exclusions. This allows insurance carriers to mitigate their risk of paying a claim resulting from high-risk conditions or activities. These will be listed in your policy contract.

Most exclusions apply to all applicants. For example, disability insurance companies typically will not pay claims for injury or illness resulting from:

  • Self-inflicted acts
  • Criminal activities
  • Acts of war
  • Civil disobedience or rebellion
  • Operating a motor vehicle while intoxicated

However, you are also subject to individual exclusions based on your medical underwriting and lifestyle choices.

For example:

  • If you have had a herniated disc, your policy may exclude claims resulting from spinal injuries.
  • If you’re an avid rock climber, the insurance company may say it will not pay benefits if you become disabled while participating in that activity.

You get the idea.

Furthermore, many policies also limit benefits if a mental illness or nervous disorder limits your ability to work.

The importance of financial ratings for insurance companies

As you research individual disability insurance options, it's crucial that you thoroughly vet the carrier issuing the policy. History and financial strength are important attributes of an insurance company.

When you buy disability insurance today, you’re planning for tomorrow. You’re counting on an insurance company to protect you. After all, someday you may depend on this company to provide a stream of monthly income for several years. So, what if the insurer goes out of business or can’t meet its contractual obligations? The effect on you and your family could be catastrophic.

That said, you can minimize this risk by choosing companies with superior financial ratings. These are grades given by third-party rating agencies.

Rating agencies assess an insurer’s ability to meet its current and future obligations to policyholders. To determine a company's rating, agencies conduct independent investigations of an insurer’s financial health.

Agencies then assign letter grades. Higher letter grades — typically anything with an ‘A’ — indicate better financial performance. A few of the agencies that rate insurance carriers and their top ratings include:

To learn more about how financial ratings are calculated, check out the links above.

How much does individual disability insurance cost?

Like any other type of disability income insurance, the cost of disability insurance for individuals depends on a number of factors. These factors that will influence your premium rate include:

  • Age
  • Health
  • Income
  • Job responsibilities

Your state of residence may also impact your rates, depending on the regulations and the claims history in your state.

To help illustrate how these factors impact premium rates, here are several scenarios showing the typical rate a person may be quoted for an individual disability insurance policy:

  • A 35-year-old man who works in a light labor position and earns $50,000 a year will pay $21 a month for a $900 monthly benefit. This applicant will pay $35 for a $1,700 monthly benefit, and $53 for a $2,500 monthly benefit. The benefit period in this case is for five years.
  • A 40-year-old professional female with a $60,000 annual income will pay $58 a monthly for a $3,000 monthly benefit that lasts five years. If this applicant opts for a 10-year benefit period, the monthly premium increases to $73.
  • A 45-year-old professional male with a $75,000 annual income can apply for a $1,300 monthly benefit that would last five years and cost $24 a month. The premium is $47 a month for a $2,600 monthly benefit or $73 for a $3,800 monthly benefit. If this individual wanted coverage that lasted to age 65, the monthly premium for a $3,800 benefit would be $97.
  • A 50-year-old female who earns $80,000 in a technical field can get a $1,400 monthly benefit for five years at a cost of $46 a month. A $2,700 monthly benefit runs about $94. A $4,000 benefit costs $151.
  • A 55-year-old male nicotine user working in a heavy labor job with an annual income of $55,000 pays $71 a month for a $1,000 monthly benefit for five years. The premium cost climbs to $126 for a $1,900 monthly benefit and $214 for a $2,800 benefit. If this person did not use nicotine, the same benefits would cost $60, $105 and $179.
  • A 60-year-old woman making $35,000 a year in an office job can get a $600 monthly benefit for five years at a cost of $26 a month. The cost is $44 for a $1,200 benefit. Premium for an $1,800 benefit runs about $68 a month.

Learn more about the cost of disability insurance.

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How can I save money on individual disability insurance?

Individual disability insurance policies can be made to fit better within your budget by employing some of the following strategies:

Buy young. As you get older, individual disability insurance will cost more. The younger you are, the more you will save on your premium.

Stay healthy. Healthy people carry less risk to disability insurers than those with chronic illnesses or adverse health factors such as obesity and tobacco use.

Comparison shop. You should obtain multiple quotes from different carriers. You can compare by getting quotes online or by enlisting an agent who represents multiple insurers.

Unisex rates for women. Individual insurance policies typically charge women more than men because of the higher risk of claims. Women can save on their insurance by finding a policy with a unisex rate. This type of policy essentially negates gender specific rates and uses an identical rate for men and women.

Pay premiums annually. Most insurance companies offer a discount if you pay premiums annually instead of monthly. If possible, try to work this into your budget. (It'll pay off over time.)

Elect a graded premium structure. To be clear, not everyone will be offered this option. But if you are, pounce on it. A graded premium starts with a lower premium payment that gradually increases over time. The amount may increase each year. There may also be a step-up rate every five years.

With a level premium structure, you will pay the same amount each month for the life of the policy, but you will pay more upfront. With graded premium, you will pay less in the first several years, then pay more over time. If you expect your income to rise over time, a graded premium structure can help you save money now until you can better afford individual disability insurance.

Are premiums for individual disability insurance tax deductible?

Unfortunately, the monthly premiums you pay for individual disability insurance are not tax deductible. If you itemize deductions when you file your tax return, do not count your disability insurance premiums.

However, disability benefits are typically treated as tax-free income. So if you do become disabled, there's no need to worry about paying income taxes on the benefits you receive.

Learn more about the tax treatment of disability insurance.

Are there situations when I should cancel my disability insurance?

Although a greedy insurance agent may tell there's no such things, there are of course situations in which canceling an individual plan would be financially beneficial.

For example, you may reach a point where the impact of a long-term disability would not be financially devastating enough to justify the premium payments for insurance coverage.

If the savings from canceling your policy outweigh the potential benefits you would receive if you collect benefits, then it may be prudent to cancel.

Potential reasons to cancel an individual disability insurance policy include:

You’re working less or not at all. Remember, disability insurance is designed to replace the income you would lose by an inability to work due to injury or illness. If you’re retired or even semi-retired, there’s little reason to maintain an individual policy.

Your fixed expenses are minimal. If you are debt-free (mortgage loans, student loans, etc.), do not have children who depend on your income and your necessary living expenses are minimal, then you may be able to go without disability insurance.

You have substantial savings. This is typically an option for people nearing retirement. If your own savings can replace your lost income for the time you would otherwise receive disability insurance benefits, it may perhaps be wiser to cancel your policy. You can then set aside what you were paying in premium to use for retirement.

Instead of cancelling your policy, there are also ways to lower your cost. Your individual disability policy may allow you to:

  • Reduce the benefit amount.
  • Reduce the benefit period.
  • Remove a cost-of-living adjustment or other optional feature.

At the end of the day, it's your income that you are paying to protect. Do what you need to do to make your individual disability insurance plan work for you.


Jack Wolstenholm is the head of content at Breeze.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

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