If you are in your 20s or early 30s, chances are you haven’t given much thought to what would happen if you suddenly couldn’t work due to illness or injury. If you’re like most people, you probably wouldn’t be able to continue making your mortgage or rent payments, buy groceries or pay your other bills for very long.
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Far too many people would be in serious financial peril if they were suddenly unable to work. According to a 2016 report from the Federal Reserve Board, 46 percent of American consumers report that, in an emergency, they would not be able to come up with $400 without borrowing or selling something.
You might be thinking: “Yeah, but the chances of that happening to me are slim, right?” Think again. According to the Social Security Administration, one in four of today’s 20-year-olds will become disabled before retirement age.
It may be true that office workers are less prone to musculoskeletal injuries than, say, someone who moves furniture for a living. But there are many injuries and illnesses that don’t care what you do for a living, like heart disease or cancer — the second and third most common cause of disability claims.
Arthritis and other musculoskeletal problems
Heart Disease and stroke
What is disability insurance?
You purchase auto insurance to protect your car and homeowners insurance to protect your house but the ability to earn a living is the largest asset for most people. Disability insurance helps protect your paycheck. It allows people who are unable to work for an extended period to continue receiving an income and help make ends meet until they can return to work or start receiving retirement benefits.
What does disability insurance cover?
You are typically eligible to receive disability benefits if an illness or injury leaves you unable to perform the basic tasks required by your occupation.
Many people mistakenly believe that their health insurance will pay for all or some of their long-term care if they become disabled. In reality, health insurance generally provides very limited long-term care benefits. Disability insurance doesn’t cover medical care or long-term care services. It is intended to replace some of your income when an illness or injury prevents you from working.
Who needs disability insurance?
If losing your regular income would make life difficult for you and your family, then disability insurance is right for you. Consider these statistics:
- 65% of working Americans say they could not cover normal living expenses even for a year if their employment income was lost; 38% could not pay their bills for more than 3 months.
- Permanent disabilities can cost workers in their 20s and 30s millions of dollars in future earnings.
- In a recent survey of people who suffered a disability, 71 percent of respondents without disability coverage said their disabilities caused a major strain on their relationships and more than a third said it directly led to the end of their relationships.
Disability insurance isn’t just for people collecting a paycheck. Even stay-at-home parents need protection. They may not receive a paycheck, but consider the value provided by running a household or caring for children. Disability insurance can help cover the cost of hiring outside help to do those tasks when a stay-at-home parent is sidelined.
Disabilities aren’t always major illnesses or injuries. Consider carpal tunnel syndrome, a condition that affects millions of Americans each year.
If your job involves typing or using your hands, carpal tunnel syndrome could derail your ability to do your job. Disability insurance would provide a safety net for you and your family while you focus on getting better.
Types of disability insurance
Disability insurance comes in two “lengths:” short-term and long-term.
Short-term disability insurance
Many employers offer short-term disability insurance. (Five states also have state mandated disability plans: California, Hawaii, New Jersey, New York and Rhode Island.) Some employers pay the entire premium on behalf of their employees while others make a contribution and the employee pays the remaining premium.
Short-term disability insurance is meant to provide benefits for a relatively short period if you become sick or injured and cannot work. Here are a few key points to keep in mind about short-term coverage:
- Some employers offer benefits only after you’ve worked there for a certain amount of time, such as three months.
- Short-term benefits generally last just three to six months.
- You need to miss a certain number of workdays before your disability benefits kick in. This is known as the waiting period.
- Typically, disability insurance policies cover 40 percent to 60 percent of your regular paycheck, up to a maximum payout (often as little as $5,000).
- If you have other income during your disability, your benefits may be reduced.
Short-term disability insurance can help bridge the gap between sick leave and returning to work. But what happens when the disability lasts beyond the time your short-term coverage ends? How do you fill the gap in your income? That’s where long-term disability insurance comes in.
Long-term disability insurance
As the name implies, long-term disability insurance helps protect your paycheck for a longer period of time. Depending on your policy, it may cover you for two years, five years or to full retirement age (67 years old). The length of time you receive benefits may also depend on whether accident or illness caused your disability.
Payments begin following a waiting period that is chosen when you purchase the policy. This is the period between the time you become disabled and the time your payments begin. Ninety days is a common waiting period, but they can range from a week to one or two years. Generally, the longer the waiting period, the lower your premium.
Long-term disability insurance may be right for you if you want the option of choosing from more riders, allowing you more flexibility to customize coverage to your needs. It’s also a good choice for people who want portable protection that they can carry between employers or to age 67.
How much disability insurance do I need?
To figure out how much disability insurance you need, start by asking yourself a few questions:
- How much monthly income would I need to maintain my current standard of living if I became disabled and unable to work?
- Do I have any other coverage available? You may have a plan in place through your employer, but group disability insurance policies typically cover only 50 percent of your monthly income. Could you and your family get by on half of your income while you are on the mend?
- How would that cut in pay affect my plans for the future? A loss of income doesn’t just affect right now, it can also impact your future. How would an immediate loss affect your ability to save for retirement or your child’s college education?
We typically recommend purchasing enough disability coverage to replace at least 50 percent of your income, but a better rule is to cover as much of your pay as you can afford.
Everyone’s situation is different, so try this handy coverage calculator to help you determine how much disability coverage is right for you based on your monthly income, current employer-provided coverage and other expenses.
Will I qualify for coverage?
During the application process, your insurer will ask questions to develop a “risk profile.” This profile is based on your health history, age, driving record and any activities you participate in that could be hazardous.
This guide from America’s Health Insurance Plan, a national trade association representing the health insurance industry, lists some other information you’ll be asked to provide when applying for disability coverage:
- Employment information enables the insurance company to understand your occupation and work duties. Full and accurate disclosure is extremely important. You should, for example, provide information on both full- and part-time employment.
- Medical history information includes information about any illness, accidents, or treatments you may have had, and whether you have had certain medical tests within the past few years. Occasionally, your application may require one or more medical tests — such as an EKG. You will likely also be asked for blood testing, including a test for exposure to HIV.
After creating your risk profile, the company determines whether they can provide coverage and how much your premium will be.
What does disability insurance cost?
Most people are surprised at how affordable disability insurance actually is. Many factors influence the premium, including:
- Age. Older applicants typically pay higher premiums.
- Sex. Rates for women are typically higher per unit of coverage than for men.
- Smoker vs. Non-Smoker. People who smoke pay more.
- Benefit Amount. Disability policies are usually issued with a specific monthly benefit amount. This is how much you would get paid per month for your claim (e.g. $3,500 per month). As benefits increase, premiums increase accordingly.
- Benefit Period. Disability policies can accommodate various benefit periods, such as two or five years or “to the age of 67.” Longer benefit periods come at a higher cost.
- Waiting Period. Most commonly, the waiting period before benefits kick in is 30, 60, 90 or 180 days. Premiums decrease as the waiting period increases.
- Occupational Class. Most insurers have four, five or six occupational classes into which each applicant is assigned. People in professional occupations (i.e. attorneys, accountants and architects) have a lower cost per unit of coverage than applicants in blue-collar type jobs.
- Benefit Features. Some companies offer multiple ways to structure the policy to suit your needs and budget. Benefit features, such as a broader definition of disability, are listed and priced separately, which allows you to add or delete as you wish.
- Ratings. Insurers may add a rating on the policies of applicants with some preexisting health problems.
Because there are so many factors that influence the rates for disability insurance policies, there is no simple answer to the question of how much disability insurance costs. However, you can see for yourself how much your plan might cost by getting an instant quote.
Is my work-provided disability insurance enough?
If you have disability insurance coverage through your job, consider yourself fortunate. You’re one step ahead of most, as less than half of consumers have employer-provided coverage. However, be aware of the pros and cons of employer provided coverage.
- Low cost. Group disability insurance policies are often paid, at least in part, by your employer.
- Convenient. An employer-provided plan is already set up for you, so you don’t need to spend time researching and shopping for individual plans. Plus, no medical exam is required.
- Group coverage isn’t portable. If you lose your job or leave your employer, you’ll lose your disability benefits.
- Limited coverage. Most employer plans only cover about 50 percent of your income. Plus, because the employer pays the premiums, benefits are taxable, further reducing your coverage amount.
- Short-term. Read the fine print or ask your HR department to find out how long your employer’s plan pays if you become disabled. A typical short-term group policy generally provides benefits for three to six months. You may want to supplement your employer’s coverage with long-term disability coverage.
Can I get disability insurance if I am self-employed?
Absolutely. In fact, we strongly recommend purchasing an individual policy. Disability insurance is an especially wise move for people who are self-employed because losing the ability to work can be disastrous — not just for your business, but for your family as well.
Consider this scenario from 360 Degrees of Financial Literacy :
“Unfortunately, just because you have become sick or disabled and cannot work, your personal and business obligations don’t stop. You are personally liable for all of the debts of your business, because as a sole proprietor, there is no legal distinction between personal and business assets. So you could lose everything you own if you’re unable to pay your debts. Adequate disability coverage can provide you with enough cash flow to prevent financial ruin for you and your business.”
The good news is, many companies offer disability insurance coverage to self-employed workers.
Do I need to be fully disabled to claim disability insurance benefits?
The sorts of injuries and illnesses covered by disability insurance largely depend on your policy. Most plans include a variety of injuries and illnesses that affect how you work — things like carpal tunnel syndrome or a back injury from a car accident.
Your policy may also refer to “own occupation” or “any occupation.” Definitions of these terms vary but in general:
- “Own occupation” means you can no longer perform your specific career
- “Any occupation” means you cannot perform the duties of any job
If your policy provides coverage during periods of illness or injury that prohibit you from doing your own occupation, you do not have to be fully disabled. You just need to be unable to do your current job.
What about Social Security benefits?
The Social Security Administration’s definition of “disability” is generally more stringent than long-term disability insurance policies. It states:
“YOU MUST NOT BE ABLE TO ENGAGE IN ANY SUBSTANTIAL GAINFUL ACTIVITY BECAUSE OF A MEDICALLY DETERMINABLE PHYSICAL IMPAIRMENT(S):
- That is expected to result in death, or
- That has lasted or is expected to last for a continuous period of at least 12 months.”
Many people who qualify for individual long-term disability insurance benefits are denied Social Security disability benefits. Not only is the definition of disability stricter and the waiting period longer for Social Security Disability Insurance (SSDI) but, for most people, SSDI benefits are not enough to maintain their lifestyle. For 2015, the average monthly disability benefit was a mere $1,165.
When can I submit a claim?
You are eligible to receive disability benefits when a covered illness or injury leaves you unable to perform the basic tasks that your occupation requires. To file a claim, give your insurer a call, and they will send you forms to complete. Fill them out and send them back, along with verification from your doctor of your disability.
What is the waiting period on a given policy?
The timing of your benefits depends on the length of your policy’s waiting period. Usually, you can choose a 30-, 60-, 90- or 180-day waiting period.
We generally recommend 90 days for a good balance between cost and coverage, especially if your long-term policy is supplementing a short-term policy provided by your employer. Short-term benefits typically last between three and six months.
How long can I receive monthly benefits?
How long you’ll receive benefits depends on the “benefit period” as outlined in your policy. The benefit period is the longest amount of time you are eligible to receive benefits. During this period, you have to remain disabled to continue receiving benefits.
Your benefit period may be two years, five years, or could cover you until age 67. A two-year benefit period is enough to cover most disabilities, especially if you are young. It’s also the least expensive option.
A five-year benefit period will protect you during a disability that requires a longer recovery period and gives you time to retrain for a new occupation if needed. For example, if your job has a physical component that your disability does not allow you to complete, a five-year benefit could be helpful while you learn new skills or go back to school.
Finally, a benefit of up to age 67 could protect you from just about anything. You could continue receiving benefits until you begin to withdraw Social Security and retirement benefits.
Bottom line about disability insurance
Anyone who depends on a paycheck or their ability to work should consider disability insurance. Accidents happen, and serious illnesses do, too. Disability insurance can help provide a crucial financial safety net when your paycheck stops.
Get your free quote now.