Disability coverage replaces income when someone can't work. The exam covers both private policies and Social Security's program, which private coverage often sits alongside.
Social Security disability
- To qualify, a worker generally must meet a recent work test (based on age when the disability began) and a duration of work test showing enough years under Social Security.
- The initial decision on whether an applicant's condition is a qualifying disability is made by the state's Disability Determination Service.
- There is generally a five-month waiting period: the first benefit is for the sixth full month after the disability began.
- Beneficiaries get Medicare automatically after two years of disability benefits, with no waiting period for ALS or end-stage renal disease.
Private disability income insurance
Disability income insurance is one of the "excepted benefits" under federal rules, so the individual-market requirements that apply to health coverage do not apply to it. Two business uses:
- Business overhead expense insurance pays a business's overhead during a long disability of the owner. Its premiums are deductible as a business expense.
- Disability buy-out insurance funds a buy-sell agreement, in which business owners agree to buy the share of an owner who becomes disabled or dies.
The tax point the exam likes
IRS Publication 535 contrasts the two: overhead premiums are deductible, but a business can't deduct premiums for a policy that pays the owner for lost earnings due to sickness or disability.