Disability insurance should be a key part of your overall financial planning. Insurance is designed to cover losses that are too large to cover with your own funds. Life insurance provides a benefit to your beneficiaries in the event of death. Health insurance covers the cost of medical care if you or your family need it. No less important is disability insurance which covers loss of income in the event that you are unable to work due to injury or disabling illness.
What is disability insurance?
Disability insurance could also be called “income insurance”. Disability insurance provides a source of income in the event that you cannot work for periods ranging from short to long term.
Disability insurance differs from other forms of insurance such as medical insurance or life insurance in that it is specifically designed to replace part of your income in the event that you are unable to work for a period of time. time due to illness or injury.
Policies vary, but generally include:
- A period of time that is covered. Short-term policies generally cover disabilities that last three to six months. Long-term policies generally cover disabilities that last longer than six months.
- A waiting period that defines how long you must be disabled before coverage begins. If you could return to work before the end of the elimination period, you would not receive any benefit for this disability. A longer elimination period will generally help reduce policy premiums.
- 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 in deciding what types of work you could actually do with your disability.
- Disability policies will generally cover a percentage of your income, 60% is common, although policies vary on this.
Why do you need disability insurance?
The chances of suffering from a disability during your working years are much more likely than dying, according to a number of studies. Life insurance protects your family and other beneficiaries in the event of death, but life insurance policies do not protect you against loss of income if you become disabled and cannot work.
Health insurance covers the costs of health care, including doctor’s visits, hospitalization, prescription drugs, and many other costs that you could incur in the event of an injury or disabling illness. However, it does not cover loss of income resulting from a disabling medical condition.
Short-term disability insurance or long-term disability insurance
Short-term disability insurance policies generally cover incapacity for work for periods ranging from three to six months. Long-term policies generally cover disabilities for longer periods which can range from a number of years up to age 65.
How to get disability insurance
The two most common ways to get disability insurance are with employee benefit coverage offered by your employer or by purchasing a policy on your own. Here are some steps you can take to get coverage:
- If your employer offers coverage, you will need to purchase that coverage as part of your employer’s annual open enrollment process. Consider the coverage offered by your employer’s plan, as it is common to offer short and long term coverage. Many employers will cover some or all of the cost of the coverage. When reviewing the options offered by your employer, be sure to consider your personal needs when deciding to stick with anything that is offered at no cost or to purchase additional coverage if it is available.
- If your employer does not offer disability coverage or if you are self-employed, you will need to purchase disability coverage yourself. Some professional associations offer disability coverage, so this could be an option for low cost coverage. Otherwise, you will need to obtain private coverage from an insurance company. Most coverage purchased from an insurance company will generally be long term, although some offer short term disability insurance policies. You will need to complete an application where the insurance company will assess your health, occupation, and other factors to determine whether or not you will be covered, how much you will receive per month, and the amount of your premium. In some cases, even if you are covered by work, you often want to add additional coverage through a private policy.
When shopping for private disability insurance, you can expect the following:
- You will need to pass a medical exam so the insurance company can verify your health information.
- They will ask you for information to verify your income, such as pay stubs and / or a tax return. Your benefit amount will be based on a percentage of your income.
- You may also be asked to provide a statement from your doctor regarding your medical history.
What else to know about disability insurance
Some other disability insurance terms / features you should know:
- Social Security also offers disability benefits, but they are notoriously difficult to claim.
- The definition of disability determines what constitutes a disability and how much coverage will cost. Some policies define disability as the inability to work in any type of job, so if your disability allows you to work, you may not be eligible to receive a benefit, or you could end up with a reduced benefit. if your salary is reduced from your previous role. Other policies will define disability as the inability to work in your specific profession, for example as a surgeon, lawyer, etc. According to this definition of disability, called professional activity, you will receive benefits if you cannot 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 usually be your cheapest option. The benefits will generally be taxable to you. If you leave the company, the contract will not be transferable, you will need to purchase new coverage either through a new employer or on your own.
- The purchase of disability privately from an insurance company offers a number of advantages, including the possibility of adapting the conditions of the policy, in particular the amount of the monthly benefit, the waiting period and the period covered by the service. The downside to private disability insurance is that it will likely be more expensive than coverage through an employer’s plan.
- Workers’ compensation is required of employers in all states and will cover you in the event of a workplace injury. However, it does not cover disabilities unrelated to a workplace incident, which is why disability coverage is necessary.
Disability insurance is an important part of your overall financial planning. Injury or disabling illness is more likely for mid-career professionals than death. Disability coverage allows you to maintain a flow of income until you are able to return to work or in the event that you cannot resume your career.