The Insurance Buying Guide: Selecting the Benefit Amount
The next factor to consider is the amount of the monthly benefit. While it would be nice to make more money if you were disabled than if you were working, this is not an option. The insurance company does not want to encourage you to stay home.
The insurance company uses what are known as issue and participation limits to determine the maximum amount of monthly benefits that may be issued. (Any state laws on the subject also would come into play.) Typically, this limit will be a predetermined percentage -- such as 70 percent or 75 percent of your earned income (before taxes).
Another factor that determines the amount of the benefit is the existence of any other disability income coverage in force. On the application for insurance, you must indicate the name of the insurance company and particulars regarding the additional coverage. Any other coverage will cause the amount requested to be limited.For example, assume that Company A will issue disability coverage up to 70 percent of a person's gross earned income. In addition, it will participate with other insurance companies' coverage up to this 70 percent maximum.
Diane, a pharmacist, earns $3,000 per month. She may purchase disability income up to 70 percent of her earned income -- or $2,100 per month. However, she indicates on her application that she has other coverage with Company X in the amount of $1,000 per month. The maximum coverage that Company A will issue is an additional $1,100 per month. Company A is participating with Company X, and total benefits are limited to Company A's issue and participation limits of 70 percent of earned income.
A third factor that can limit a policy's benefit amount is your non-earned income. Typically, if a person has non-earned income amounting to $15,000 or more each year, the insurer will want to reduce the benefit amount.
A high net worth also can reduce your need for disability insurance -- and the insurance company's desire to provide it for you. If you're a multimillionaire, you're basically self-insured and probably don't need disability income insurance. Your personal and/or business assets should provide plenty of protection. The insurance company is aware of this: It may decline coverage for a person with a high net worth -- or offer some small token benefit.
In short, when an insurance company'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 after taxes. In this way, the loss is made relatively whole again. If you were to get more than the equivalent of your take-home pay, the insurance offers you a disincentive to return to work and encourages you to commit fraud.
