Disability Income Protection
What is disability insurance ?
When building a financial safety net, many people look to protect against the unknown with life insurance and health insurance. But your ability to earn income is your greatest asset and is crucial to any financial plan; if you’re unable to work, how do you plan for the future or meet your immediate needs, like paying bills?
Disability insurance can help. It’s income protection that keeps money coming in when you can’t work due to illness or injury. Disability insurance comes in long-term, and short-term versions, and the Social Security Administration also provides disability insurance. Long-term disability insurance is often the most overlooked.
How does disability insurance work?
Disability insurance is like insurance for your paycheck. When you’re unable to work, disability insurance can replace your income stream to make sure you can put food on the table, your basic necessities are met, and you can maintain your lifestyle so it never changes in any unforeseeable circumstances. The benefit payment from a private policy is tax-free (employer plans may be taxed) and pays out for a certain period of time, as outlined in your policy.
The type of disability insurance you have determines some of the different guidelines and features, like how long the policy will pay. In general, here’s what you need to know about how disability benefits are determined:
Premium — How much you pay each month for your policy. The cost will depend on the benefit amount, benefit period, elimination period, and policy specifics.
Benefit amount — How much you’ll receive each month. In most cases, it’s optimal to have your disability benefits equal at least 60% of your pre-tax pay.
Benefit period — How long you’ll receive benefits. With short-term disability insurance, the maximum benefit period is usually 52 weeks; long-term disability can last until retirement (age 67), however long that may be.
Elimination period — Also known as the waiting period, this is how long you must wait before you begin receiving benefits. Typically the longer you wait, the less expensive the policy. Learn more about the elimination period.
Definition of disability — What qualifies you for receiving disability benefits. An own-occupation disability insurance policy defines a disability as the inability to work at your regular occupation, even if you still might be able to work at another occupation.
Riders — These give you the ability to customize a policy. For example, you can choose to add a cost-of-living adjustment, future increase option, or residual disability benefit to increase your benefit options. Adding a rider may increase the cost of your policy.
Note that disability insurance is different than workers’ compensation. Workers’ comp only covers an injury or illness incurred at work. Most disabilities happen off the job and therefore wouldn’t be covered by workers’ comp.
Long-term disability insurance
Long-term disability insurance can be offered through an employer as group coverage, but more comprehensive plans are privately purchased from an insurance company. Long-term insurance can last two, five, or 10 years, or until retirement. It usually costs around three percent of your annual income.
Long-term disability is the best type of disability insurance for most people. It lasts longer than short-term disability insurance; it is easier to qualify for and provides a larger benefit than Social Security disability insurance.
Why is disability insurance important?
According to the Council for Disability Awareness, 1 in 4 workers will become disabled before they retire. Coupled with the fact that the average disability outlasts short-term policies, and how difficult it is to qualify for SSDI, long-term disability insurance makes sense as part of a financial safety net. Without it, workers run the risk of falling behind in their long-term goals, depleting their savings, and not being able to keep up with their day-to-day expenses.
Who needs disability insurance?
Because illness is a more common cause of disability than injury, it’s not limited to people with labor-intensive jobs. That means anyone can benefit from some sort of disability insurance policy if they’re not wealthy enough to self-insure and cover their financial plans without an income.
Disability insurance can be especially important for people who have invested in their education. Total student loan debt in the United States totals almost $1.5 trillion, and without an income many borrowers would be unable to make loan payments.
Additionally, high-income earners may benefit from disability insurance. They often fall into the above group, as professions like doctors and lawyers require additional education, and they also have specialities that can make finding other work difficult, as well as a higher cost of living.