Primary purpose: Disability income insurance replaces 50%–70% of gross pre-disability income when illness or injury prevents working; benefits are cash paid to the insured for any purpose.
Why benefits are partial: Intentional design to maintain return-to-work incentive and control moral hazard.
Disability statistics: ~1 in 4 twenty-year-olds will experience disability before retirement; illness (not accidents) causes most long-term claims.

Definition	Who Qualifies	Insured Can Work Elsewhere?	Premium Level
True own-occupation	Cannot perform duties of specific job	Yes, and collects full benefits	Highest
Modified own-occupation	Cannot perform specific job duties AND not working elsewhere	No	High
Any-occupation	Cannot perform duties of any suitable job	N/A — if you can work anywhere, benefits stop	Lowest
Hybrid (group standard)	Own-occ for 24 months, any-occ thereafter	Yes for first 24 months	Low
Loss-of-income / residual	Can work but earns at least 20% less	Yes — proportional benefit paid	Rider cost

Elimination period: Time-based deductible; typical LTD individual = 90 days; longer period = lower premium; first check arrives ~30 days after elimination period ends (paid in arrears)
Benefit period: Duration of payments; options include 2 years, 5 years, to age 65/67; "to age 65" is the most comprehensive
COLA rider: Increases benefit during disability to offset inflation
Non-cancelable: Insurer cannot raise premiums or change terms; strongest guarantee
Guaranteed renewable: Cannot be canceled, but premiums can be increased for a class
Residual rider: Proportional benefit for partial disability; calculated as (income loss %) × (monthly benefit)

SSDI: Federal, earnings-based; strict definition (total disability, 12-month duration or death); 5-month waiting period; 24-month Medicare wait; SGA threshold 2026 = $1,690/month
Workers' compensation: State-mandated; work-related injuries/illnesses only; covers medical expenses + ~66.67% wage replacement; does not cover personal illness or off-duty injury
Offset clauses: Private policies typically reduce benefits dollar-for-dollar by workers' comp or SSDI received

Feature	Individual	Group (Employer-Sponsored)
Policy owner	Insured	Employer
Portability	Yes — fully portable	No — ends with employment
Disability definition	True own-occ; stays constant	Transitional (own-occ 24 months → any-occ)
Underwriting	Full medical and financial	Guaranteed issue at enrollment
Premium stability	Fixed (non-cancelable)	Can increase at renewal
Tax treatment of benefits	Tax-free (after-tax premiums)	Taxable (employer-paid premiums)
Governing law	State contract law	ERISA (federal)

The IRS "Either/Or" Rule: The government taxes either the premium income or the benefit income — not both.

After-tax premiums paid by insured → Benefits tax-free
Employer-paid premiums (deducted) → Benefits fully taxable as ordinary income
Mixed premiums → Benefits taxable in proportion to employer-paid share; tax-free in proportion to employee after-tax share

BOE: Pays business fixed expenses during owner's disability; 12–24 month benefit period; premiums deductible; benefits taxable (wash)
DBO: Funds mandatory buyout of permanently disabled owner's equity; 12–24 month elimination period; cross-purchase or entity-purchase structure
Key person DI: Business owns policy on key employee; pays business for revenue loss and replacement costs; premiums not deductible; benefits tax-free

Own-occupation definition — Disability measured against the insured's specific job duties; most favorable to insured

Any-occupation definition — Disability measured against any job for which insured is reasonably qualified; most favorable to insurer

Elimination period — Time-based deductible; period insured must be disabled before benefits begin

Benefit period — Maximum duration of benefit payments

COLA rider — Automatically increases benefits during disability to offset inflation

Residual/partial disability — Condition allowing partial benefit when insured can work but earns less due to disability

Non-cancelable — Insurer cannot raise premiums or alter terms as long as premiums are paid

BOE insurance — Reimburses business for fixed operating expenses during owner's disability

DBO insurance — Disability buy-out; funds purchase of disabled owner's business equity

Key person disability — Business-owned coverage for revenue loss when a critical employee becomes disabled

SSDI — Social Security Disability Insurance; federal, earnings-based, strict definition, 5-month wait

SGA (Substantial Gainful Activity) — Earnings threshold above which SSDI is denied; $1,690/month (2026, non-blind)

ERISA — Federal law governing employer-sponsored group plans; restricts claimants' legal rights vs. state contract law