Individual disability income insurance pays you benefits if you can’t work because you’re sick or injured. Some individual policies pay partial benefits if you can only work part-time due to sickness or injury. Individual policies specify how much you will be paid, how soon after you are disabled payment will begin, and when payment will end. Policies generally provide replacement of 50 to 70 percent of income. The length of time for which you may receive benefits can depend on whether accident or illness caused the disability. Monthly benefits are payable for a fixed period set forth in the policy, e.g. 2 years, 5 years, to age 65, or for the rest of your life, while disability continues. Benefits begin following a waiting period, which is the period between the time you become disabled and the time your benefit payments begin. Waiting periods can range from one week to a year or even two years. In general, the longer the waiting period the lower the cost of the policy.

If you purchase an individual disability income insurance policy for yourself, and pay premiums with after-tax dollars, the benefits you receive are generally tax free.

Two features that may be part of disability income policies are important for you to understand: noncancelable protection and guaranteed renewable protection. An insurer cannot cancel or refuse to renew either type of policy, as long as premiums (i.e., price of insurance protection for a specified period) are paid on time. These features differ, though, in important ways.

• Noncancelable. The policy’s premium can never be raised above the amount shown in the policy, and benefits may not be reduced—as long as premiums are paid on time.
• Guaranteed renewable. You have the right to renew the policy with the same benefits, but the insurer can increase your premiums— as long as they are increased for all other policyholders in the same class (i.e., having the same characteristics).

Initial premiums for guaranteed renewable policies may be lower than for noncancelable policies, but the guaranteed renewable premiums can go up over time. Less expensive policies that may not offer a noncancelable or guaranteed renewable option are sometimes available.