How to Insure Your Income: Unearned Income/Net Worth

A third factor that can limit a policy's benefit amount is unearned income. Unearned income refers to rents, royalties, interest, dividends, etc. This income is paid regardless of your disability or work status.

If you have substantial amounts of unearned income, your insurance company may reduce the benefit amount it will sell you. The meaning of substantial amounts of unearned income will vary from company to company. A person with a few thousand dollars of unearned income will not be affected. Typically, if a person has annual unearned income amounting to $15,000 or more, the insurer will want to reduce the benefit amount.

Despite what we've noted about high income, high net worth can reduce a person's need for disability insurance. A person with sizable net worth, such as a multimillionaire, is basically self-insured and probably doesn't need disability income insurance. This individual's personal and/or business assets will provide protection.

In fact, a person with a high net worth may well be declined by an insurance company or offered some small token benefit.

Your needs do come into play, but -- regardless of your needs -- the amount of coverage will be limited by your earned income, unearned income, and the insurance company's issue and participation limits. These factors are designed to prevent overinsurance, which might give a policyholder incentive to fake a disability.

The purpose of insurance is to make a loss whole again. Thus, when an insurer's issue and participation limits are 70 percent of gross earned income, this amount probably will be very close to your net income -- or take home pay. Therefore, the loss is made relatively whole again.

Unfortunately, the problem faced by many people is overspending their incomes. With installment purchases, credit cards, etc., many people live beyond their current incomes. The amount of a disability income benefit is designed to discourage overspending tendencies.