The most valuable asset you have isn’t your car, home, or retirement account. It’s you and your wellbeing. Disability insurance is a type of insurance that you can purchase that ensures that you will be provided an income if you are unable to work due to a disability.
What is Disability Insurance?
Disability insurance is a type of coverage that replaces a portion of your income if you become unable to work due to a disability. There are two main types of disability insurance: short-term and long-term.
- Short-term disability insurance typically provides benefits for a few months to a year, covering temporary disabilities such as recovery from surgery or childbirth. It usually replaces 60% to 70% of base salary.
- Long-term disability insurance offers coverage for more extended periods, sometimes until retirement age, for more severe and long-lasting disabilities. It typically replaces 40% to 60% of base salary.
The specifics of the coverage, such as the percentage of income replaced and the duration of benefits, vary depending on the policy.
Disability insurance can be purchased privately; for example, many life insurance companies offer disability insurance. Your employer may offer disability insurance or Social Security also provides disability insurance.
Both short-term and long-term disability insurance have an elimination period, that insured individuals must be disabled for, before receiving benefits.
Is Disability Insurance Right For You?
More than 1 in 4 20-year-olds will experience a disability for 90 days or more before retirement, according to the Social Security Administration. We often think of catastrophic events like a massive car accident, but most disability claims come from back injuries, heart attacks, diabetes, cancer, and other illnesses.
While everyone can benefit from disability insurance, certain groups of people would value it the most:
Primary Breadwinners
If you are the main source of income for your family, disability insurance is crucial to ensure that your loved ones are financially protected if you cannot work.
Self-Employed Individuals and Business Owners
Without the safety net of employer-sponsored benefits, self-employed individuals and business owners need to secure their income through individual disability insurance policies.
People with Physically Demanding Jobs
Professions that involve manual labor or high-risk activities are more likely to result in disabilities, making insurance particularly important.
Individuals with Limited Savings
If you do not have significant savings to fall back on, disability insurance can prevent financial hardship during periods of disability.
How to Get Disability Insurance
There are several ways to obtain disability insurance:
Employer-Sponsored Plans
Many employers offer disability insurance as part of their benefits package. These plans can be more affordable and convenient than purchasing individual coverage. It’s essential to understand the details of your employer-sponsored plan, including what percentage of your salary is covered and the duration of benefits.
Individual Policies
If your employer does not offer disability insurance, or if the coverage is insufficient, you can purchase an individual policy. These policies are tailored to your specific needs and can provide more comprehensive coverage. While they may be more expensive, they offer greater flexibility and portability if you change jobs.
Social Security Disability Insurance (SSDI)
This government program provides benefits to individuals who meet specific criteria. However, qualifying for SSDI can be challenging, and the benefits are often lower than those provided by private insurance.
Professional Associations
Some professional organizations offer disability insurance to their members at group rates. This can be a cost-effective option, especially for individuals in high-risk professions.
Why Buy a Disability Policy Yourself?
Purchasing an individual disability insurance policy offers several significant advantages, providing a level of security and flexibility that employer-sponsored plans often cannot match. Here are the key benefits of buying a disability policy yourself:
Customized Coverage
When you purchase an individual policy, you can tailor the coverage to meet your specific needs. This means you can choose the benefit amount, the waiting period before benefits begin, and the duration of coverage. Customizing your policy ensures that you are adequately protected based on your financial obligations and personal circumstances.
Portability
One of the most compelling reasons to buy a disability policy yourself is portability. Employer-sponsored plans typically end when you leave your job, but an individual policy stays with you regardless of your employment status. This continuity of coverage is especially valuable if you change jobs frequently or plan to start your own business.
More Comprehensive Benefits
Individual disability insurance policies often offer more comprehensive benefits than employer-sponsored plans. For example, individual policies may cover a higher percentage of your income, include cost-of-living adjustments, and provide additional features such as partial disability benefits, which pay a portion of the benefit if you can work part-time or in a reduced capacity.
Guaranteed Renewability
Many individual disability insurance policies come with a guaranteed renewability clause, meaning the insurer cannot cancel your policy as long as you continue to pay the premiums. This guarantee provides long-term security, ensuring that you remain covered even if your health deteriorates over time.
Tax-Free Benefits
The benefits from an individual disability insurance policy are typically tax-free if you pay the premiums with after-tax dollars. In contrast, benefits from an employer-sponsored plan may be subject to taxes, depending on how the premiums were paid. This tax advantage can significantly increase the net amount of your disability benefits.
Greater Control Over Policy Terms
When you buy your own disability insurance, you have greater control over the policy terms and conditions. You can select riders or add-ons that enhance your coverage, such as future purchase options, which allow you to increase your coverage as your income grows, or residual disability riders, which provide benefits if you experience a loss of income due to a partial disability.
Coverage for High-Income Earners
Employer-sponsored disability plans often have benefit caps that may not fully replace the income of high-earning individuals. By purchasing an individual policy, you can ensure that a larger portion of your income is protected, providing sufficient coverage to maintain your lifestyle and meet your financial obligations.
Flexibility in Choosing the Insurer
Buying an individual policy allows you to choose an insurer with a strong reputation for customer service, financial stability, and claims processing. This flexibility ensures that you are working with a provider you trust, which can make a significant difference when you need to file a claim.
Protection Against Policy Changes
Employer-sponsored plans are subject to change at the discretion of the employer. They can modify the benefits, change the insurance provider, or even discontinue the plan altogether. An individual policy, on the other hand, offers stability and predictability, as the terms of your coverage remain consistent over time.
Overall, disability insurance is a vital component of a comprehensive financial plan, offering essential protection against the risk of lost income due to illness or injury. By understanding the importance, types, and benefits of disability insurance, and by evaluating your personal needs and circumstances, you can make an informed decision to secure your financial future.
