Are Disability Income Insurance Benefits Taxable?

Disability income insurance benefits pay a percentage of your gross income when you are ill or injured and cannot work. But if you must live on only a percentage of your income, will your benefits be taxed?

Are Disability Income Insurance Benefits Taxable?

Whether or not disability income insurance benefits are taxable depends on several factors, including the source of your plan, whether you deduct premiums on your taxes, and who pays for the premiums.

Calculator and money on a table with a paper on top with word taxable income on top of the money
  • Employer-sponsored income insurance – If your disability income insurance is employer-sponsored and your employer pays the premiums, your benefits are taxable.
  • Privately-owned income insurance – If you purchased a private policy and pay the premiums with after-tax dollars, the benefits are not taxable.
  • Deduct premiums on your taxes – According to Internal Revenue Service Publication 535 – Business Expenses, you can deduct disability income insurance premiums on your taxes if you own an overhead insurance plan. An overhead insurance plan pays business overhead expenses if you cannot work due to illness or injury. But if you deduct the premiums, your disability income insurance benefits will be taxed.

How Much Do Disability Income Insurance Premiums Cost?

Disability income insurance premiums cost one to three percent of your income. If you are self-employed, a business owner, or a contractor, disability income insurance provides income when an illness or an injury prevents you from working.

Disability Income Insurance Basics

Before you apply for disability income insurance, it helps to know a few basics about it. Depending on your insurance company, your plan may differ.

  • Age requirement – The minimum age requirement for disability income insurance is 18. The maximum age is 60.
  • Claim waiting period – After your policy is effective, there is usually a 30-day waiting period before you can file a claim.
  • Benefits waiting period – You will receive your first payment in 30 to 45 days after your claim is approved.
  • Percentage of benefits – Most plans will pay up to 60% of your income.
  • Maximum benefit period – Most plans have a maximum benefit period of two to ten years.

For more details, read our post, 6 Facts About Income Protection Insurance You Might Not Know.

Interested in Disability Income Insurance?

If you live in North Carolina and are interested in disability income insurance—or income protection insurance—John Hunt of Hunt Insurance in Raleigh can help. Contact us to schedule a consultation.

5 Facts You Should Know About Residual Disability Benefits

Disability income insurance replaces a portion of your income if you are ill or injured and unable to work. Some disability insurance plans offer residual benefits even if you are sick or injured but can still work part time. What is residual disability income? And how are payments calculated?

1. What Is a Residual Disability Income Payment?

A residual disability income payment is a reduced benefit based on a percentage of your lost income if you can only work part time due to an illness or injury. Your insurer may offer an add-on feature, called a partial disability rider, that allows you to purchase the option to receive partial income replacement if you can still work part-time.

According to Bureau of Labor statistics, in 2019, 32 percent of workers with a disability worked part time, compared with 17 percent for those with no disability. So, for many families, a residual disability rider is worth considering.

2. How Are Residual Disability Income Payments Calculated?

Residual disability income payments are calculated based on the income you are losing if you can only work part time. You will receive a percentage of the total monthly disability benefit stated in your policy. In many cases, if your income loss is greater than 75%, the insurer will pay you 100% of your monthly disability insurance benefit.

For example:

  • Your disability income insurance payment is $3,000 per month for full-time disability.
  • You purchased a residual disability income rider.
  • After an illness or injury, you can only work 40% of your full-time schedule.
  • Depending on your policy, the residual payment will be approximately 60% of $3,000 (total monthly benefit) or $1,800 per month.

3. Do You Qualify for Residual Disability Income?

Infographic of five facts about residual disability benefits

You might qualify for residual disability income if your disability insurance automatically includes residual disability benefits or if you purchased a rider for it.

Although you must read your policy and contact your insurer to confirm eligibility, you might qualify in these circumstances:

  • Loss of income: As a result of your disability, your work schedule is reduced, and you lost income.
  • Unable to perform all duties: You are unable to complete some of your job responsibilities.
  • Unable to work your full schedule: Your disability prevents you from working the same number of hours as before your illness or injury.

4. What Are Your Options for a Residual Disability Rider?

Many insurers that offer a residual disability rider have at least two options to choose from—basic and enhanced. As expected, the cost of the rider increases with the level of benefits it provides.

  • Basic – A basic rider usually requires a significant percentage of lost income before you can receive partial payment.
  • Enhanced – An enhanced rider reduces the percentage of lost income you must experience before benefits are paid. And an enhanced rider offers more benefits overall.

5. Do You Need a Residual Disability Rider?

Whether or not you need a residual disability rider depends on your unique circumstances.

Some factors to consider:

  • Amount of your savings
  • Number of your dependents
  • How a disability would affect your work performance and the physical or mental requirements for your job
  •  Your living expenses and any debt
  • How much disability income insurance you need or already have

Interested in NC Disability Income Insurance?

If you live in North Carolina and are interested in disability income insurance, contact Hunt Insurance of Raleigh. We will give you personalized service and thorough answers to help you decide if disability insurance is right for you.

How Much Does Disability Income Insurance Pay?

Disability income insurance replaces a percentage of your income if you’re ill or injured and unable to work. Whether you live alone or have family members that depend on you, having a portion of your income replaced can give you peace of mind and ease the stress of being ill and unable to work. Although it sounds like a good idea, is it worth it? And how much income replacement will you receive?

How Much Will Disability Income Insurance Pay?

Disability income insurance generally pays 45% -65% of your gross income if you have short-term disability coverage. Long-term disability insurance pays typically 40% – 50% of your gross income. The payments are tax free. As your monthly benefit increases, so will your premiums.

Are There Age Limits for Applying?

You must be at least 18 years old but not more than 60 years old to apply for disability income insurance.

How Much Are Disability Income Premiums?

Premiums are typically 1.5% and 3% of your gross income. Your gender, age, health status, and lifestyle affect your premiums. If you smoke, your premiums will be higher.

Infographic for disability income insurance from Hunt Insurance of Raleigh, NC

How Long Does Coverage Last?

Disability income coverage length depends on whether you’re receiving short-term or long-term disability insurance. You might be able to purchase a rider—or add-on—to extend your coverage period.

Short-term disability insurance – Although it depends on the policy, coverage usually lasts three to six months.

Long-term disability insurance – Most insurance companies have plans that have a maximum benefit period of two to ten years.

When Does Coverage Begin?

There is a waiting period—usually 30 days from the date your coverage begins—before you can receive benefit payments. If you become ill or injured and unable to work, there is usually a 30- to 45-day waiting period before the insurance company processes your first benefit payment. Payments are generally issued monthly.

Unless your policy states otherwise, disability income insurance payments don’t coordinate with Social Security Disability payments. You’ll receive separate checks.

How Much Disability Income Insurance Do You Need?

If you decide to purchase disability income insurance, purchase enough to care for your needs—food, shelter, and clothing. Your list of monthly expenses might include:

  • Cleaning supplies
  • Food
  • Health care
  • Internet
  • Mobile phone bill
  • Mortgage or rent payment
  • Necessary clothing
  • Needs for dependents living in your household
  • Personal care products
  • Transportation – car payment, gas, public transportation fees
  • Utilities

If you’re interested in partial income replacement if you’re unable to work for medical reasons, Hunt Insurance of Raleigh, NC, can help. We’ll review your options for disability income insurance and guide you in deciding how much disability income insurance you need.

Does Disability Insurance Have Cash Value? 4 Facts About Getting Some of Your Premium Payments Back

Asian woman wearing white and working on a laptop; for information on whether disability insurance has cash value.

Disability insurance and life insurance have different purposes. Disability insurance supplements your income if you become ill and are unable to work. But life insurance provides benefits to your survivors if you die. Some types of permanent, or whole, life insurance policies build cash value. But what about disability insurance—does it have cash value?

Will Your Disability Insurance Policy Build Cash Value?

Although disability insurance doesn’t build cash value like permanent life insurance, there is a way to get some money back from the long-term disability premiums you’ve paid. You can add a feature—or rider—to your disability income insurance. It’s called the return-of-premium rider.

What Is a Return-of-Premium Rider?

A return-of-premium rider is a feature of long-term disability. When you meet the policy requirements, you’ll receive a percentage of your premiums back—on average, 50 percent. If you add a rider to your disability income insurance policy, you’ll have higher monthly premiums. And if you become disabled and unable to work, your return of premium payments might be affected.

When Will You Receive Return-of-Premium Payments?

Payment schedules vary depending on your insurer, the policy, and the terms of the return-of-premium rider. A rider might include one or more of these features.

  • Milestones – Your insurer has a schedule for returning a percentage of your premiums. For example, the rider on your policy might send you payments every 8, 10, or 20 years.
  • At age 65 or 67 – Some riders only return premium payments when you reach age 65 or 67—when your policy expires.
  • Policy lapse – If your policy lapses, you may qualify to receive a percentage of premiums you have paid up to the date it lapsed.
  • Upon your death – You can designate payments to a beneficiary or your estate.

Is Paying Higher Disability Income Insurance Premiums Worth It to Get Some Cash Back?

A return-of-premium rider can cost two to four times the amount of your base premium. Weigh your decision based on your needs, budget, and the factors below.

  1. Your annual salary – As an example, if your annual salary is $50,000, your yearly disability income insurance payments can range between $1500 and $2000.
  2. Return-of-premium rider – If the annual amount for your payments is between $1500 and $2000, the rider will increase yearly payments to approximately $3000 to $6000.
  3. Milestone payments – The terms of your policy determine when you are refunded a percentage of your premium. And depending on your insurer and policy terms, the payout can be 50 percent or more of your premiums.
  4. Disability income insurance payments – If you receive disability insurance income payments within the milestone, your insurer will subtract the amount of those payments from your return-of-premium payments.

Some consumers weigh the cost, decline the return-of-premium rider, and put the money they would have paid on premiums into a savings account.

Hunt Insurance of Raleigh-Durham, NC, will explain your options for disability income insurance. The only cost is the time you want to spend discussing your concerns. And you’ll get a free quote. Contact us today.

At What Age Can You Drop Disability Income Insurance?

Disability income insurance replaces some of your income if you become ill and unable to work. But how long do you need to keep it? When you reach a certain age, do you no longer need disability income insurance?

Should You Drop Disability Income Insurance Based on Your Age?

Self-employed wooden instrument maker carving a violin; for information on Raleigh disability income insurance from Hunt Insurance.

Several factors influence when you might discontinue disability income insurance—and your age when the events occur varies by individual circumstances. Disability income insurance supplements your employment income, so regardless of your age if you’re still working, you might need the coverage. Consider a few scenarios.

  • Your retirement age – When you fully retire, you don’t have employment income. And you might not need disability income insurance if you become ill after retirement. If your retirement benefits are enough to supplement your income, you can consider discontinuing the insurance. Still, if you retire and are under age 62, you might decide to keep disability income insurance until you receive social security benefits.
  • Your employment type – If you’re self-employed, consider if you have enough savings to cover an extended illness that prevents you from working. Otherwise, it may be wise to keep the policy until it expires.
  • Social Security income benefits – If you think your Social Security benefits are enough, and you don’t think you’ll need extra income if you become disabled, it might be time to drop your policy. If you are disabled, you can find out if you qualify for social security disability benefits.
  • Policy expiration – Most disability income insurance policies end at age 65 when you begin to receive retirement benefits, social security benefits, or both. Many policyholders decide to keep disability insurance until the policy ends.

Is Keeping Disability Insurance a Waste?

Although it may seem that keeping disability insurance is a waste of money, consider some statistics from the Centers for Disease Control and Prevention (CDC):

  • Each year about 43 million people have emergency room visits.
  • Six in ten U.S. adults have a chronic disease.
  • Four in ten U.S. adults have two or more chronic diseases.
  • The leading causes of death and disability include heart disease, chronic lung disease, cancer, stroke, Alzheimer’s disease, diabetes, and chronic kidney disease.
  • Lifestyle risks for chronic illness include smoking, excessive use of alcohol, poor nutrition, and lack of exercise.

A healthy lifestyle helps prevent chronic illness, but there’s no guarantee. An accident or unexpected illness can happen to anyone. Disability income insurance eases the stress of being unable to work and losing your income.

What If Your Job Provides the Insurance?

If your employer provides disability income insurance, you may not need to purchase insurance from an external source. But consider your circumstances, financial responsibility, and family size with the factors below:

  • Amount of coverage – What percentage of income replacement is available with your employer-sponsored insurance?
  • Coverage period – When does coverage begin and end if you become disabled and cannot work?
  • If you’re no longer an employee – If you leave the company or lose your job, what happens to your disability income insurance? Will you lose it?

On average, disability insurance premiums are three to four percent of your income. You can customize coverage to match your needs. Read our disability income insurance page for information on what a policy can cover.

At Hunt Insurance, we’ll give you a free, no-obligation quote. We communicate openly and honestly to prevent you from being over- or under-insured. Call or e-mail us to start the conversation.