Group of silhouetted people for disability insurance

How Does Disability Insurance Work?

Disability insurance will typically pay out benefits for policyholders that have been out of work and not earning an income for at least 90-180 days. 

At that point the disability insurance is there to help maintain lifestyle in the event that one can’t earn an income anymore.

How Long Will Disability Insurance Continue to Pay?

That depends upon that plan chosen. There are disability insurance programs available for numerous lengths of coverage time after a disabling event occurs.

For instance, you can purchase a plan that pays out for 24 months (2 years) as a shorter term solution. That type of plan would help a policyholder get back on their feet and get rehabilitated, and would reduce the cost of the plan itself in the process.

There are also 5 year and 10 year plans, as well as plans that pay until the policyholder reaches age 65/67/70. 

Longer term plans are ideal for situations that render a policyholder unable to work at all for the rest of their working years. The longer term policies would provide income until the policyholder can retire.

In the most robust of policies, it’s even possible that the disability insurance will pay out as long as the policyholder cannot perform their exact duties anymore – even if they can obtain paying work doing something else.

In those cases, it may be the case that the only work that person can now obtain pays far less than their previous career. The disability insurance would then supplement that income.

How Much Does Disability Insurance Pay?

This depends on the specific plan chosen, with variables such as:

  • Circumstances that affect whether benefits can be paid, and how much of the maximum amount will be paid
  • Plan coverage length from the time of the disability
  • The overall amount of coverage sought – is the plan meant to supplement income or replace it?

Generally speaking, disability insurance will pay out, at minimum, $500-1000 per month. That amount can be higher depending on the plan chosen.

Can Disability Insurance Be A Business Expense? And Is It Taxable?

Both parts of this question depend on whether an employer is paying for the policyholder’s disability insurance or if that policy is purchased individually.

When a person’s employer provides disability insurance, any benefits paid out by the policy are taxable income, according to the IRS.

Alternatively, when a person purchases their own disability insurance policy and pays for it themselves, after tax dollars, the benefits paid out are not taxable.

The policy being a business expense or not is determined along the same lines. If one’s employer is paying for the policy, the policyholder could not claim it as an expense. 

When the plan is purchased individually, particularly as a business owner, then it can indeed be a business expense along with other business-related insurance policies. However, the owner must still report the premium as compensation/pay tax on the premiums; by doing so, the benefit remains tax free. 

Most individuals secure their own individual policies as an employee of a larger company, and will always pay premiums with after-tax dollars. Again, the business owner CAN use business dollars to pay the premium – which still saves paying the whole cost after tax – but the premiums must be considered income with tax paid on that amount.

Note that it is also possible to use an individually purchased disability insurance plan to supplement one provided by an employer.

Does Disability Insurance Pay For Maternity Leave?

Maternity is not considered a disability, so insurance plans do not pay benefits for the period of a time a new mother is on maternity leave.

One notable exception to this is in the event that a complication during childbirth causes a disabling condition. If that happens, the policyholder could indeed be eligible for benefits.

InsureSTAT Content Team

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