How Does Disability Income Insurance Work?

Disability income insurance is one thing that no one ever thinks about. No one ever thinks that they could become disabled. However, millions of people become disabled every single year. Either an accident or illness causes people to have to miss work. For some people, this is a temporary arrangement, while others face permanent disability. Since disability is something that most people never consider, disability income insurance is something that most people do not understand. How exactly does disability insurance work? Let's take a look at the basics.

What Is Disability Insurance?

Imagine that you were driving down the road one day and crashed your car. As a result of the accident, you are physically injured so that you cannot perform your job. If this happened, how would you pay your bills? Just because you are injured does not mean that the mortgage or the car payment will stop coming. Would you be able to pay your bills from other income sources?

In most cases, people do not have enough money coming in from other sources to live off of if they were to lose their jobs. They will need some sort of passive income coming in while they are disabled in order to pay the bills. This is the role that disability insurance plays. If you are injured so that you cannot perform any job, they will pay you a monthly payment to cover your bills. It is important to realize that you must be prevented from doing any job, not just your current one.

Are You Covered?

You need to determine whether or not you are covered. Many employers have some form of disability insurance that will cover you in the short term. Most of them do not have long term disability packages, but you may be covered by as much as 5 years. Ask your employer if you are covered, if you do not know.

Federal disability benefits are another source that you may be covered by. Through the social security administration, most people will receive some sort of disability if they are injured. While it is something, you probably will not be able to live off of the social security payment. You may not even be able to pay a mortgage from disability income insurance that you currently are covered by.

Is It Taxable?

Are disability insurance benefits taxable? It depends on your situation, but most of the time at least a portion of them is taxable. If you exceed certain income limits you will pay disability insurance income tax. If you make between $25,000 and $34,000 you will have to pay taxes on 50% of the benefits you receive. The more you make above that, the higher percentage you will have to pay taxes on.


If you assess your current situation with your employer and find that you are not covered sufficiently, it is a good idea to buy disability insurance on your own. While you never know if you will need it, it is much better to be prepared if something were to happen.

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