Disability Income and Medical Expense Insurance
Disability income mechanics
The definition of disability decides everything. Own occupation pays when the insured cannot perform their own specific job (broader, more expensive); any occupation pays only when unable to perform any job for which they are reasonably suited by education and experience. Split definition policies use own-occ for the first two years, then any-occ. Elimination period is the waiting time before benefits begin (longer period = lower premium); benefit period is how long they last. Residual (partial) disability pays a reduced benefit when income falls but is not eliminated; presumptive disability pays in full for losses such as total blindness or loss of two limbs, with no elimination period.
Benefits typically replace 60–70% of income, and insurers offset Social Security and workers' compensation. Nonoccupational policies exclude work-related injury.
Business uses
Key person disability replaces a vital employee's contribution; business overhead expense pays rent and staff while the owner is disabled; buy-sell funding provides a disability buyout.
Medical expense coverage
Hospital/surgical, major medical, comprehensive, critical illness, accident, and long-term care. LTC triggers when the insured cannot perform 2 of 6 activities of daily living (bathing, dressing, eating, toileting, transferring, continence) or has cognitive impairment; benefits are commonly per-diem or reimbursement of actual charges.
Taxation trap
If the employer paid the premium (and did not include it in income), the disability benefit is taxable. If the insured paid with after-tax dollars, benefits are tax-free. Medical expense benefits generally are not income; LTC benefits are tax-free up to an annually adjusted per-diem limit.