It is easy to imagine experiencing a house fire and needing homeowner’s insurance coverage. We have heard the horror stories of the consequences of not having enough life insurance. But what about insuring what’s arguably your most valuable asset: your paycheck? Disability insurance is the coverage that kicks in if you find yourself unable to work, either for a period of time or for the rest of your life.
A 1 in 4 chance you’ll need it
According to the Social Security Administration 1 in 4 workers over the age of 20 will experience the need for income protection during their working years. Your ability to earn money is the most powerful asset you’ll have during your working year — other assets you’ll accumulate don’t even come close. The average high school graduate is expected to earn just under $1 million over their working career — the numbers just go up for those with college degrees.
Insuring your goals
How you harness that income determines the place you live and the lifestyle you maintain. Your retirement depends heavily on how much of your income can you set aside while you are working. In short, disability coverage protects your ability to achieve your financial goals.
Despite its importance, I find that most people are unaware of the specifics of their disability insurance unless they have been faced with the possibility of needing the coverage. If you ever need to make a disability claim, it will quickly become clear that the specifics matter. Here are some questions you need to ask yourself to make sure you have adequate coverage.
The essentials of disability coverage – what you need to know
1. Should you go with group or individual coverage?
Group: Many people work for employers who provide disability insurance as a paid employee benefit. As part of that, you may be able to purchase supplemental coverage that you pay for yourself. Being part of a group plan has some advantages:
- Premiums are usually lower
- Your employer has done the research for you
- A medical exam may not be required
Individual: Having your own policy that’s not tied to your work can have advantages as well. Although you have to qualify medically, once your insurance is approved, that coverage remains in effect as long as you pay your premiums. Other advantages:
- You can tailor your coverage to your specific needs
- Tax free benefits (since individual policies are paid with after-tax dollars)
- You don’t have to worry about losing coverage if you leave your job
Which way you go will be decided by your job stability, affordability and perhaps your own health — if you have a condition that could impact even getting individual coverage, it will be important to enroll in your work-based plan during the window that doesn’t require underwriting (which could only be when you are initially hired).
2. How much income can you insure?
One long-held theory regarding disability insurance asserts that a person would have little incentive to recover from an illness or injury if their policy paid a benefit equal to 100% of their salary. For that reason, most policies cover between 60% – 70% of your income. In many cases, group policies only cover 50%-60%. That would be one reason you may want to look into purchasing supplemental coverage to get you closer to 70%.
3. How long is the waiting period?
This is the time between when you become disabled and when you can start collecting benefits, sometimes also called the “elimination period.” During this period, no benefits are paid to you. Typical waiting periods depend on the type of coverage you have:
- For short-term disability insurance provided by your employer or the state, the waiting period can range anywhere from 0 – 14 days.
- For long-term disability group or individual policies, it can range anywhere from one month to a couple of years. Generally, the longer the waiting period, the less you (or your employer) pay.
Rule of thumb: long-term policies with a 90-day waiting period are typically the most cost efficient. Hence the other rule of thumb about your emergency fund being able to cover at least 3 months worth of expenses.
4. What is the benefit period?
The second timeline you need to understand is how long your policy will pay you once it kicks in. Short-term disability policies are typically provided by employers, and they usually pay anywhere from 30 days up to 52 weeks (aka 1 year).
Long-term disability policies pay for a specified number of years as outlined in the terms of the policy. If you have employer-provided coverage, the short-term and long-term usually coordinate. Most long-term policies pay for 2 – 5 years, with the best policies paying until you turn 65.
5. How does Social Security fit into this picture?
It’s true that Social Security pays disability (“SSDI”), but there are limitations, some of them major. Things to know about that include:
- SSDI doesn’t cover short-term disability or partial disability. Your disability must be TOTAL – which means it’s expected to last at least one year or result in your death.
- If you are approved, there is a five-month waiting period before benefits begin.
- It’s difficult to qualify. More than half of all initial disability claims are denied by the Social Security Administration.
6. How does workers compensation affect disability?
Workers compensation only pays if your disability is work-related (i.e., injured on the job), and it offers only limited protection. How much you receive and what disabilities are covered varies by state. For information on your state, visit www.workerscompensation.com. It’s best not to rely on workers comp, which is provided by your employer, as your sole disability coverage.
The best policy: take care of you
Regardless of what disability coverage you have, nothing beats a policy of taking care of your health. To the extent that you can, take every opportunity to care for yourself. Make sure you are following the best practices for preventative care like scheduling your annual check-ups and getting those screenings when you hit certain ages. Visit your dentist and floss. If your employer offers wellness initiatives, take part in them — good health is priceless (plus you may earn some incentives).
It’s true that even the healthiest of us can get seriously sick or injured no matter what — sometimes there’s nothing we can do about it. But we can prepare for the financial impact a disability may create for us.
If you have coverage through your employer, you were probably given the details of the plan when you were first hired. It’s a good idea to review those details (the waiting period, the percent of income your policy will replace, etc) and make sure that the rest of your financial plan accounts for those factors. If you don’t have coverage through work, think about what a long-term absence from work will mean to your finances. The cost of the premiums might be well worth the coverage you’ll get if you do become disabled.