Disability Insurance never pays 100% of someone's income as a disincentive to just keep drawing the disability benefit and never returning to work. By having a limited disability income benefit, the insured person may be inspired to strive to go back to his/her old job and previous, 100% wage.
Disability insurance is paid out on a tax free basis, for that reason it will pay you the "net" amount of your income that you are wishing to replace. Typically it is around 60% to 70% of your "gross" pay. Different companies will allow percentages between those amounts. Also you will not be needing commuting costs or other costs related to working.
Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
Insurance companies deal with risk. Moral risk is a problem that they also confront. If there isn’t an incentive to return to work, the company could be paying benefits for an extended period of time. A drop in income during a disability is offset by lower taxes, lower expenses and a less vigorous lifestyle. Many find that their disability income pays a reasonable amount; however, they are usually eager to return to work.
The purpose of insurance is not to get ahead, but to compensate for what was lost. Therefore, insurance companies put limits on benefits so that people do not use insurance to come out better than they would have if they had not had the misfortune that caused them to collect on their policies.
In the case of a permanent disability, it is hard to imagine any benefit high enough to compensate for that loss. But there are those who would recover fully, yet never return to work if they could continue to receive their full salary without having to labor for it. The latter is the type of activity insurance companies try to discourage by putting limits on the benefit. It is not just so their companies can make money, although I'm not saying that doesn't enter in. It is also so premiums can stay lower and the companies stay solvent for the benefit of all their policy holders.
Agent Owner, Gilmore Insurance Services, Marysville, Washington State
Why does disability insurance not pay 100% of your income? Well, in a way it does. Disability insurance is designed to replace your after tax income. Depending on how you funded your disability insurance and accounted for it tax wise, the benefit can come to you as non income. There is also a way to actually have more than 100% of your income protected. You can buy your individual coverage before being covered by a group plan. The two can combine to leave you with more than 100% income.
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In the case of a permanent disability, it is hard to imagine any benefit high enough to compensate for that loss. But there are those who would recover fully, yet never return to work if they could continue to receive their full salary without having to labor for it. The latter is the type of activity insurance companies try to discourage by putting limits on the benefit. It is not just so their companies can make money, although I'm not saying that doesn't enter in. It is also so premiums can stay lower and the companies stay solvent for the benefit of all their policy holders.