Disability insurance should be a key part of your overall financial planning. Insurance is designed to cover losses that are too big to cover with your own out-of-pocket funds. Life insurance provides a benefit to your beneficiaries should you die. Health insurance covers the cost of medical care should you or your family need it. No less important is disability insurance that covers lost income in the event that you are unable to work due to a disabling injury or illness.
What Is Disability Insurance?
Disability insurance could also be called "income insurance." Disability insurance provides an income stream in the event that you are unable to work for periods of time ranging from short-term to long-term.
Disability insurance differs from other forms of insurance like medical or life insurance in that it is specifically designed to replace a portion of your income in the event that you are unable to work for a period of time due to an illness or an injury.
Policies vary, but they typically include:
- A period of time that is covered. Short-term policies typically cover disabilities that last three to six months. Long-term policies typically cover disabilities that last more than six months.
- An elimination period that defines how long you need to be disabled prior to coverage kicking in. If you were able to return to work prior to the end of the elimination period, you would not receive any benefit payments for this disability. A longer elimination period will generally help reduce the premiums for the policy.
- A definition of what constitutes a disability. This can vary widely and can be a factor in determining what types of illnesses and injuries the policy will cover, as well as deciding what types of work you actually might be able to do with your disability.
- Disability policies will generally cover a percentage of your income, 60% is common though policies will vary on this.
Why Do You Need Disability Insurance?
The odds of suffering a disability during your working years is far more likely than dying, according to a number of studies. Life insurance protects your family and other beneficiaries in the event of your death, but life insurance policies do not protect you against the loss of income if you become disabled and can't work.
Health insurance covers the costs of health care including doctor's visits, hospitalization, prescription drugs and many other costs that you might incur in the event of a disabling injury or illness. It does not, however, cover the loss of income arising from a disabling medical condition.
Short-Term Disability Insurance vs. Long-Term Disability Insurance
Short-term disability policies typically cover an inability to work for periods ranging for three to six months. Long-term policies typically cover disabilities for longer periods that can range from a set number of years all the way to age 65.
How to Get Disability Insurance
The two most common ways to get disability insurance are via the employee benefits coverage offered by your employer or by purchasing a policy on your own. Here are some steps to take to obtain coverage:
- If your employer offers coverage you will need to sign up for this coverage as part of your employer's annual open enrollment process. Review the coverage that your employer's plan offers, offering both short and long-term coverage is common. Many employers will cover some or all of the cost of coverage. When reviewing the options offered by your employer, be sure to consider your personal needs when deciding on whether to stick with whatever is offered at no cost or to purchase additional coverage if offered.
- If your employer doesn't offer disability coverage or if you are self-employed you will need to obtain disability coverage on your own. Some professional associations offer disability coverage, so this might be an option for low-cost coverage. Otherwise, you will need to obtain coverage privately through an insurance company. Most coverage purchased from an insurance company will typically be long-term, though some do offer short-term disability policies. You will need to complete an application where the insurance company will evaluate your health, occupation and other factors to determine whether or not you will receive coverage, how much you benefit will be per month and the amount of your premium. In some cases, even if you have coverage through work, you many want to add additional coverage via a privately obtained policy.
When shopping for private disability insurance, you can expect the following:
- You will need to take a medical exam so the insurance company can verify your health information.
- They will ask for information to verify your income such as pay stubs and/or a tax return. The amount of your benefit will be based on a percentage of your income.
- You may also be asked to supply a statement from your doctor regarding your health history.
What Else to Know About Disability Insurance
Some other terms/features of disability insurance that you should know:
- Social Security also offers disability benefits, but they are notoriously difficult to qualify for.
- The definition of disability determines what constitutes a disability and how much coverage will cost. Some policies define disability as not being able to work at any type of job, so if your disability allows you to work at all you might not be eligible to collect a benefit, or you might end up with a reduced benefit if your pay is reduced from your prior role. Other policies will define disability as not being able to work at your specific occupation, for example as a surgeon, an attorney, etc. Under this definition of disability, called own-occupation, you will collect benefits if you can't work in your normal occupation. This is more typical of a policy purchased directly from an insurance company than with a group policy from an employer.
- Disability insurance through your employer's group plan will typically be your cheapest option. The benefits will typically be taxable to you. If you leave the company, the policy will not be portable, you will need to obtain new coverage either via a new employer or on your own.
- Purchasing disability privately on your own from an insurance company offers a number of advantages including the ability to tailor the terms of the policy including things such as the amount of the monthly benefit, the elimination period and the time frame that the benefit covers. The downside of private disability insurance is that it will likely be more costly than coverage via an employer's plan.
- Worker's compensation is required of employers in every state and will cover you for a work-related injury. However, it doesn't cover disabilities not related to a workplace incident, hence the reason disability coverage is needed.
Disability insurance is an important component of your overall financial planning. A disabling injury or illness is more likely for mid-career professionals than death. Disability coverage allows you to maintain a stream of income until such time as you are able to return to work, or in the event that you are unable to resume your career.