Disability insurance with passive income

If you earn a passive income, disability insurance offers protection if market volatility requires you to return to work, but you may not always qualify for coverage.

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Disability insurance benefits replace your income while you’re disabled and can’t earn an income. If you earn a passive income, whether you need disability insurance depends on your personal situation.

Passive income is income earned from investments, such as interest or dividends, and other sources like pensions, royalties, annuities, and alimony. If you earn enough passive income to self-insure, you may not need disability insurance as much as someone who needs to work for their income. Some high-earners may not even be eligible for disability insurance.

However, if there’s any chance that your passive income could run out, or become reduced due to changes in the market, then disability insurance could provide you the cash you need to live on while you recover from a serious illness or injury.

How disability insurance complements passive income

While some people may be able to live off their unearned income, returns are not always guaranteed. If your passive income runs out, or if your investments take a dip, you may not have enough passive income to live off of.

Having disability insurance before you decide to live off your passive income can prepare you for the possibility that you’ll have to return to work.

There’s also the chance that becoming disabled could significantly increase your day-to-day expenses, like the cost of medical care to treat your illness or injury. In that case, you may find that your passive income isn’t enough to cover the costs, and that disability insurance benefits could help make up the difference.

Can passive income affect my disability insurance coverage?

Whether receiving passive income can affect your ability to get disability insurance depends entirely on your insurance company.

During the application process, you’ll go through underwriting, which is when the insurer evaluates your application materials and decides what your final premium and benefit amount will be. Part of underwriting is a review of your medical history, and the other part is financial underwriting — a look at your occupation and income. Every insurer has their own guidelines for underwriting.

If you earn a passive income, a few different outcomes are possible:

You could receive reduced benefits

Some insurers will only offer you a reduced benefit if you already earn a passive income. While the amount differs between disability insurers, the reduction will generally be the lesser of one of the following:

  • An annual dollar amount of passive earnings, such as $30,000 or $50,000

  • The percentage by which unearned income exceeds your earned income, such as 10% or 25%

Other disability insurance companies may have a similar stipulation where the reduction is equal to one-half of any passive income earned over a certain dollar amount, like $1,500.

You could receive full disability benefits

Many disability insurers don’t take any passive or unearned income into account when determining your benefits. If you have passive income and need disability insurance, a licensed representative at Policygenius can help you find a policy that won’t reduce your benefits.

Again, this is dependent on the insurer’s underwriting guidelines and the type of policy you’re taking out. Group disability insurance often doesn’t count passive income, but such a policy may not have enough coverage to help you maintain your normal standard of living should you become disabled. For the most coverage, you may need a long-term disability insurance policy with a benefit amount large enough to keep paying your mortgage or student loan bills.

You might not qualify for disability insurance

If your net worth, whether from earned or unearned income, exceeds a certain amount, you may not be eligible for disability insurance coverage. Some insurers set this threshold for net worth as high as $10 million, but others set it at $2.5 million. High-earners may be eligible for disability insurance, but their benefits could be reduced.

If you can’t get disability insurance coverage from one insurer, or another reduces your benefits too much, there are some insurers that offer full coverage. These insurers may charge higher premiums, but the price could be worth it when you become disabled and need to rely on those benefits to survive.

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Disability insurance to protect future passive income

Get disability insurance when you’re younger and healthier, and it could save you thousands of dollars on premiums versus purchasing when you’re older. But if you’re an ambitious young person who expects to make a living off passive income when you’re older, buying disability insurance early means your benefits won’t be affected when you become professionally successful.

You just need to make sure your policy is guaranteed renewable and non-cancelable. These provisions mean that as long as pay your premiums on time, the insurer can’t cancel your policy, modify its terms, or raise your premiums. Many policies already have these terms, but it’s always good to double-check before you sign up.

You can even make sure that the policy accounts for the high income you expect to make, whether passive or earned, by adding the future increase option rider. With this extra coverage, your coverage can increase without the need for additional medical underwriting as long as you’re willing to pay higher premiums.

Social Security disability insurance and passive income

Social Security disability insurance (SSDI) is like commercial disability insurance, but it's much harder to qualify for. It also only pays a small benefit amount, although it doesn’t cost anything to receive coverage.

The Social Security Administration, which oversees SSDI, does take earned income into account when determining your eligibility and how much you can receive in benefits. However, it does not count unearned or passive income for this purpose, no matter how much you receive.