Your disability policy’s benefit amount impacts two major components of your coverage. For one, your premiums are directly affected by your benefit amount. In all cases, the larger the benefit amount, the more expensive your premiums are. The second impact comes becomes important when you need to go on claim. The less your benefit amount, the smaller the benefit you’ll receive since the policy is designed to pay a maximum each month. If you would like us to analyze the benefit amount of your existing disability insurance policy to see if it fits your goals, please contact us.
What is a Policy Benefit Amount?
For someone who owns a disability insurance policy, the policy benefit amount is the most familiar feature. The potential benefit is also the first question that most people ask when purchasing a policy. A disability policy has many components, but they all have an amount paid to the insured monthly, should the insured go on claim (become disabled). The amount available is your policy benefit amount. It is a dollar amount paid directly to the insured, once on claim, until the lesser of these two factors:
- The insured is no longer disabled.
- The benefit length is exceeded.
Once one of these two conditions are met, the disability policy will stop making payments.
How Much of a Benefit Amount Do I Need?
Enough.
Ok, maybe I should add a little more detail. If you pay for your own disability insurance policy, then your benefit will be tax free. If you have an employer paid benefit (and you don’t pay the additional taxes due on the premiums they pay for you), then your benefit will be taxable.
For most people reading this website, we’ll assume you’re looking for (or already own) a disability insurance policy that would be tax free were you to go on claim. So, your monthly benefit need not be as high as if you had a taxable benefit. This is good news, since disability insurance companies will rarely issue more that 60%-70% of your actual income, anyway.
Most people choose the maximum benefit for which they can qualify. This reflects the fact that most people, from the blue-collar worker to the highly-specialized surgeon, spend a very large percentage of what they make. If one was to become disabled and unable to perform the substantial duties of their occupation, then that person would want to maintain their lifestyle and not cut back on the “perks” they’ve afforded themselves (think cars and vacation homes, rather than the high-end cable T.V. package).
However, if you’re one of the few people who spend much less than you make, you can get away with having a lesser benefit than what you’re qualified for through income. Since this individual is saving additional cash flow each month, if a lower benefit was selected, then the only thing that suffers is their savings or retirement plan (which is what I’m assuming they’re doing with their additional cash flow). There are disability insurance plans that (depending on your occupation) can even assist in creating a backstop for this, allowing for a certain benefit percentage to protect your lifestyle, while having a second benefit amount designed to fund your retirement plan.
Benefit Amount Examples
For a total disability, typically defined as being unable to do your job, a disability insurance benefit amount is fairly easy to understand. You’ll be paid whatever your benefit amount is, until the factors listed in the “What is a Policy Benefit Amount” section. If you are partially or residually disabled, things get a little murkier as to what portion of your benefit amount is payable to you. A partial disability assumes you can work some of the time, but not full time. You’ll normally be entitled to a certain percentage of your disability benefits for a limited time. A residual disability is based on having a loss of income due to a disability. This will be triggered based on the carrier. Some companies will allow for residual benefits, once you can demonstrate a 15% income loss, whereas others will not kick in until you have a 20% loss.
To further muddy the waters, your occupation class can play a role as to whether a benefit amount is payable. If you have a true own occupation policy and become disabled and go to work in another profession (for example, a surgeon develops a tremor and cannot operate anymore but can still diagnose and consult), you could receive both your new paycheck and your full benefit amount, even if that means you’re making more money than you were prior to your disability. Other policies might offer a “transitional” own occupation definition of disability. This would allow that same surgeon to work in her new profession, and her disability policy would pay enough of a benefit amount to make her whole from her previous earnings.
These are just a few examples. As you can see, this is a complex subject; however, at its core, the benefit amount is straightforward: It is the maximum amount from your disability insurance policy that you’re entitled to monthly, should you suffer an illness or accident that prevents you from working.
In Summary
The benefit amount on your disability insurance policy is a very important component of your coverage. If you’re unsure about how much disability insurance you need, you can try this calculator.
The most important fact to note is this: No disability insurance client is the same. Each of you have different financial situations, goals, and overall objectives. Purchasing a plan from an unbiased, independent expert is the best way to get the proper coverage in place. Please contact us today or fill out the quote form on the left for a complementary analysis.