Does passive income affect disability insurance benefits?

Unearned income doesn’t affect Social Security benefits, but it may affect your coverage for long-term disability insurance.

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Amanda Shih

Amanda Shih

Editor & Licensed Life Insurance Expert

Amanda Shih is a licensed life, disability, and health insurance expert and a former editor at Policygenius, where she covered life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.

&Elissa Suh

Elissa Suh

Senior Editor & Disability Insurance Expert

Elissa Suh is a disability insurance expert and a former senior editor at Policygenius, where she also covered wills, trusts, and advance planning. Her work has appeared in MarketWatch, CNBC, PBS, Inverse, The Philadelphia Inquirer, and more.

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Becoming disabled could significantly increase your day-to-day expenses, like the cost of medical care to treat your illness or injury. 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.

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Passive income includes money from investments, such as interest or dividends, and other sources like pensions, royalties, annuities, and alimony. Having passive income can affect your eligibility to receive certain types of disability insurance benefits. For example, unearned income can reduce how much long-term disability insurance coverage you can buy. On the other hand, passive income won’t affect disability benefits from Social Security or group disability insurance, which you typically get through your employer at no cost.

Key takeaways

  • Passive income is income you earn without actively working for it.

  • The SSA won’t take passive income into account when you’re applying for disability benefits.

  • Having passive income can reduce the amount of coverage you can buy when you take out an individual disability policy.

Passive income and Social Security disability insurance benefits

Social Security disability insurance (SSDI) provides disability benefits for people who have a permanent and total disability that will result in death or last for an indefinite amount of time. The benefits are smaller than with a long-term policy you purchase on your own, but they come at no cost. You just have to be eligible and file a claim.

How much you’re eligible to receive in SSDI benefits depends on how much money you earn, and that doesn’t include unearned or passive income. Passive income can include royalty payments, pension, dividends and interest from investments, like ETFs, REITs, and more. No matter how much you receive, the Social Security Administration won’t count unearned income against you. 

Rental income from owning real estate won’t affect your eligibility for SSDI benefits either, as long as you don’t maintain or work on the property. For example, if you renovate the property then you’ve put in work, so you can avoid this by hiring a property manager to do the work on your behalf. The income from a rental property could also be considered earned income if you receive it as part of your business as a real estate agent. 

If you have more questions about unearned income and qualifying for SSDI benefits, you can consult with a disability attorney. 

Passive income and long-term disability insurance benefits

When you buy a long-term disability policy, you'll go through an underwriting process, which is when the insurer evaluates your occupation and income to determine how much you’ll pay in premiums and the benefit amount you’ll receive if you become disabled. 

If you have a passive income, it can reduce the amount of disability coverage you can get because you can continue to receive passive income even if you become disabled. Let’s say you receive $4,000 a month from your employer and collect $1,000 in passive income from a rental property. The disability insurance may view your wages as $3,000 when offering you a policy. 

Disability insurance companies have different ways of calculating a reduced benefit. For example, they may look at the average annual passive income over two years. If you’re looking for disability insurance and earn a passive income, a licensed representative at Policygenius can help you find a policy that provides you with sufficient coverage and benefit payments.

Passive income and disability frequently asked questions

What is the effect of passive income on a disability benefit?

If you have both earned and passive income, only the earned income can be covered by long-term disability insurance, and depending on how much passive income you have, it can reduce the amount of coverage you can buy when you apply for a policy.

Does passive income affect Social Security disability benefits?

The Social Security Administration only takes earned income into account when determining your eligibility for benefits, so you can qualify for Social Security disability even if you receive passive income (like investment interest).

Does rental income affect Social Security disability benefits?

Rental income is typically considered passive, so it shouldn’t affect your eligibility to receive SSDI benefits. But if you perform work, like renovations or maintenance, on the rental property, then any income you receive may be considered earned and count against you.