According to one source, you can be up to four times more likely to become disabled during your working years than you are to die. Yet we hear about life insurance, its benefits, and the different types of policies much more frequently than we hear about disability insurance. If you are of working age, and especially if you have dependents, you should consider purchasing a disability policy immediately.
If you become disabled due to injury or illness, you may have to quit your job or take an extended leave of absence. Even with the best of emergency funds, you may find yourself out of money within weeks or months. Your employer may allow for an unpaid leave of absence while keeping your benefits – so your health insurance may cover medical costs, but you still need a way to cover ordinary living costs such as housing, food, and transportation. Disability insurance provides you with a means to do this.
If you are young, you may think you don’t need disability insurance – you’ve heard that you probably don’t need life insurance unless you have dependents. But young people may be even more in need of disability insurance, as they are less likely to have significant savings or liquid assets, and will have a longer wait to retirement if they are unable to ever go back to work.
Social Security does provide limited disability benefits for covered workers -– but the definition of disability is quite strict, and there are often many hoops to jump through to qualify for an amount that will almost certainly be less than your actual income.
Both short and long term disability polices exist.
Short term disability policies are often covered by employers. They cover you for anywhere from 30 to 90 days, and are often used for things like a planned surgery from which you will make a full recovery. If you have a good emergency fund, covering at least 6 months of expenses, a short term disability policy is probably not necessary for you.
Most people do need, and should have, a long term disability policy, and that’s what we’ll focus on for the rest of this article. Long term polices kick in after some elimination period without benefits – usually 30 to 90 days. Policies have different specifics (see below) but basically replace some percentage of your income for some period of time. The New York Times has a great list of questions to ask before buying disability insurance.
If you decide to purchase long term disability insurance, look for the following characteristics (in order from most to least important) to maximize coverage and reduce risk while also managing premiums:
Your employer may offer both short term and long term insurance, and may even pay for one or both. Talk to your HR director or benefits manager for more information. You may have to wait for open enrollment to register for coverage.
If your employer doesn’t offer a policy, or you want to purchase additional insurance (a good idea if you plan to move or change jobs in the near future, or if your employer’s plan lacks some of the characteristics above), get several quotes before purchasing. Start with whoever holds your home and/or auto insurance – maybe you can get a discount for purchasing another policy. Then ask trusted family members or close friends if they have a policy, and if they can put you in touch with their agent. Finally, look at some of the major insurance companies – MetLife, Northwestern Mutual, etc.
If you pay your own premiums, the benefit will not be taxable if it is ever paid out. If your employer pays the premiums, the benefits will be considered ordinary income. If you split the costs, you will pay taxes on a proportion equal to the proportion of the premiums that your employer paid.
If you can afford it, disability insurance is one of the best ways to manage risk and protect your assets in case of illness or injury. Premiums for individual policies run upwards of $1,800 a year, but group policies through your employer can be less than half that. Do your best to find the cash – if a tragedy (or even just minor accident) strikes, you’ll be glad you did.