According to a Cornell University study, 10.5 percent of Americans between the ages of 21 and 64 reported a disability in 2011. If you fall ill or suffer an accident, a disability can prevent you from going to work and earning an income. Insurance programs such as Workman’s Compensation and employer-sponsored plans can help replace that income; when the coverage falls short or you do not have access to these coverages, private disability insurance can provide you some financial security.
If you are a small business owner or independent professional such as a doctor, lawyer or accountant, you typically have no access to employer-provided disability insurance. If you could not go to work because you suffered an illness or an accident, you could find yourself in a dire financial situation as your bills mount up and you exhaust your savings. A private disability insurance protects you by paying you a monthly benefit, typically up to 70 percent of your pretax income.
With private disability insurance you can choose your own amount of coverage up to a certain limit determined by a percentage of your pretax income. The insurance company evaluates the risk you represent by looking at a variety of factors such as your overall health, whether you smoke and how likely are you to suffer an accident on the job. The type of job you perform is important to the insurance company, as certain jobs are riskier than others. An accountant who sits at a desk all day may not go through the same daily strains as a chef who stands most of the time, works with knives and is subject to constant stress, for instance.
Generally you can tailor-make a policy to suit your needs and control the cost. You can choose the benefit period, or how long the proceeds will be paid to you. Typical benefit periods run for two or five years, and often all the way to age 65. You can also choose your waiting period, which is the time from when you suffer your disability until the time the payments start. Waiting periods are usually 30 to 120 days; the longer the waiting period, the cheaper your premium.
If you suffer a disability you have to prove to the insurance company that you meet its definition of disability. The definitions vary generally based on the risk of your occupation. You may have to prove you are unable to perform the duties of your own occupation, even if you could work somewhere else. For example, a surgeon who has hurt his hands but can still teach is still considered disabled under the "own occupation" definition of disability. A "regular occupation" definition is stricter, as not only you must be unable to perform your own duties, but not be able to perform any other duties for which you were trained. The stricter the definition, the more expensive the premium.
Tax Treatment of Benefits
Private disability insurance premiums are typically paid by you, and you receive the proceeds tax-free. If the premiums are paid by your business -- for example, as an incorporated professional using money from his corporation -- the premiums are added to your taxable income, and any disability proceeds you receive remain tax-free.
Philippe Lanctot started writing for business trade publications in 1990. He has contributed copy for the "Canadian Insurance Journal" and has been the co-author of text for life insurance company marketing guides. He holds a Bachelor of Science in mathematics from the University of Montreal with a minor in English.