Is disability covered in life insurance?

Life is full of uncertainties. Saving for your financial future can seem challenging when you don’t know what will happen 10, 20, or even 30 years down the line. Building up a cash buffer and investing your money can help to plan for prepare for uncertainty. Getting life insurance can also help you to plan for the unexpected.

It seems clear enough that life insurance promises to pay your loved ones a lump sum in the event of you passing away. But what happens if you are still alive but can no longer work to earn an income? Can you access your life insurance pay out?

What Coverage Does Life Insurance Offer?

The insurer guarantees to pay a lump sum of money to a policyholder’s beneficiaries when the policyholder passes away. In exchange, the holder is expected to pay fixed monthly amounts, known as premiums.

The coverage offered by a life insurance policy mainly depends on the type of life insurance policy that the holder chooses. Generally, there are two life insurance policies – term life insurance policy and permanent life insurance policy. Term policies expire after a fixed number of years, while permanent policies stay intact until the policyholder dies, stops paying their premiums, or opts out of the policy.

The payout from life insurance can only be accessed by the named beneficiary. Policies are also designed so that they cover almost any kind of death, with some exceptions. These exceptions include situations where there is fraud or illegality on the part of the policyholder or the beneficiary.

Life Insurance Policy and Disability

In most cases, life insurance policies are not designed to be accessed by the policyholder. They only become accessible after their death. The lump-sum acts as an income replacement for the life insurance policy beneficiary. They may need this income to offset debt, pay for the children's education, meet household expenses, funeral, and other end-of-life costs.

However, it is not unusual for an insurer to allow the policyholder additional. These options are referred to as policy riders. They offer benefits that the owner can add to their existing life insurance policy. One of such riders is the disability income rider.

A disability is a medically diagnosed condition that makes it challenging to engage in day-to-day activities. A disability income rider can pay a monthly benefit to an insured person who suffers a disability that affects their ability to work and earn an income.

Is a Disability Income Rider the Best Option for You?

There are certain factors you must consider before you opt for the 'disability income rider'.

Higher Premiums

The regular premium that an ordinary life insurance policy attracts will increase.

Reducing your Life Insurance Payout

Accessing funds from your life insurance can defeat the purpose of your life insurance policy. It will mean that you will not leave behind a large enough benefit for your beneficiary.

You must apply when you are taking up your life insurance policy

Riders must be added when you are purchasing the life insurance policy. It will be challenging and most unlikely to add features after your policy is issued.

What Is the Better Option?

Disability insurance is a standalone policy that guarantees the policyholder access to an agreed percentage of their lost income. These policies will pay that percentage of your income for a more extended time if you cannot work. This policy typically covers situations such as injury, illness, psychological issues, or other situations that hamper capacity to work.

Certain employers can offer either short-term disability benefits or long-term disability benefits, or both. The coverage offered by these policies can either be short or long-term. While a short-term disability benefit cushions the effect of your disability immediately after it occurs, a long-term policy protects you financially from severe long-term disabilities.

Final Thoughts

You can access disability insurance as an individual, or as a member of a group benefits plan through your work.

As a rough estimate, disability insurance typically costs about 2% of the person's annual salary. Of course, the actual amount will depend on the insurance carrier and policy features such as those discussed above. Feel free to reach out to a licensed insurance advisor to help determine if disability insurance coverage (or a rider) is right for you.