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.
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Why You Need Disability Insurance
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.
Types of Disability Insurance
Both short and long term disability polices exist.
Short-term Disability Insurance
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.
Long-term Disability Insurance
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.
Important Things to Look for in a Long-term 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:
- Own occupation: Look for an “own occupation” policy that will pay benefits if you cannot do your own, current occupation – for instance, if a surgeon can no longer use his hands, or a secretary develops a condition that prevents sitting for long periods of time. “Any occupation” insurance will only pay out if you are totally disabled to the point of inability to work at all. This basically means that if you can do any job, even one at a significantly reduced salary, you will not get paid your benefit. These policies are cheaper, but nowhere near as valuable. Look for own occupation, or a hybrid “income replacement”.
- Benefit amount: Generally speaking, you should look for a policy that covers at least 80% of your salary at the time of disability. Yor needs may be different – use this calculator to double check. Do not buy into a policy that gives a set dollar amount – you never know when you could have a new, higher-paying job or massive raise around the corner!
- Benefit period: Until age 65. Having a set period such as 5 years will result in lower premiums, but is not a good option for someone in their 50s or younger. You need coverage until retirement age, when you can begin tapping retirement accounts and claiming Social Security.
- Inflation adjustments: Pay extra if necessary for a benefit with an annual cost of living adjustment, to help keep up with inflation. If you are disabled at 30 and draw benefits for 30 more years, you do not want to receive the same dollar amount the entire time!
- Elimination period: 60 – 90 days, or as long as your emergency fund can cover you before you will need benefits. Longer elimination periods mean lower premiums.
How to Purchase Disability Insurance
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.
Taxes on Disability Insurance Benefit
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.
Just do it
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.
Jill grew up in Texas, graduated from college in 2007 and is currently working in the DC metro area. Jill recently completed a 9-month certificate program in financial planning and will take the Certified Financial Planner (CFP) exam in November. After that she hopes to become a full-time financial planner. You can also find her as a staff writer at My Dollar Plan.