Your most valuable asset isn’t your house, your car, or your retirement savings. It’s your ability to earn a living.
Disability insurance pays a portion of your income if you are unable to work for an extended period of time due to illness or injury.
“Anyone who relies on a paycheck should have this insurance,” said Keith Hoffman, vice president of disability insurance at NFP Corp., a New York-based insurance brokerage and consulting firm.
Here’s what you need to know:
Why you need disability insurance
It may seem unlikely that an injury or illness will require months or years off work, especially if you’re young, healthy and have a desk job.
But according to the Social Security Administration, more than 1 in 4 20-year-olds will experience a disability of 90 days or more by the time they reach age 67.
“No one thinks it will happen to them,” said Carol Harnett, president of the Disability Awareness Council, an insurance industry group.
One reason people downplay the risks is because they imagine the worst – a spinal cord injury leaving them quadriplegic, or an amputation in a horrific accident – but the majority of disability claims are for back injuries, cancer, heart attacks, diabetes and other illnesses, Harnett said.
“The question people have to ask is, ‘What if I can’t work? How far can I get by without a paycheck?'” Harnett said.
Types of Disability Insurance
There are two main types of disability insurance: short-term and long-term. Both will cover a portion of your monthly base salary for the period you are disabled, up to a limit such as $10,000. Some long-term policies will also pay for additional services, such as training to help you return to work.
Short and long term
Short-term disability insurance
Long-term Disability Insurance
Typically, this will be 60% to 70% of your base salary.
Typically, compensation is between 40% and 60% of base salary.
Paid for several months to a year depending on the insurance
Benefits end when your disability ends. If your disability continues, benefits end after a certain number of years or at your mandatory retirement age.
There may be a short waiting period, such as two weeks, between when you become disabled and when benefits are paid.
The typical waiting period before disability benefits are paid is 90 days.
Disability policies have different definitions of “disability.” Some policies pay benefits only if you can’t work the job you’re qualified for, while others only pay benefits if you can’t perform the duties of your occupation. Some policies cover partial disability and pay a portion of your benefits if you can work part-time. Some policies only pay benefits if you can’t work at all.
How to get disability insurance
Here’s how to get compensation:
Get employer-sponsored insurance at work. Most employers that offer disability insurance will cover some or all of the premiums. According to the Society for Human Resource Management, five states offer or require employers to offer short-term disability benefits: California, Hawaii, New Jersey, New York, and Rhode Island.
Purchase disability insurance through your workplace. Some employers don’t cover the cost of disability insurance, offering it as an optional employee benefit. This allows employees to purchase insurance at a group discount through their employer’s insurance broker.
Disability insurance is purchased through professional organizations. Many professional organizations offer insurance to their members at group rates.
Buy a personal disability insurance plan. You can buy one from an insurance broker or directly from an insurance company. Major sellers of personal disability insurance include Guardian, MassMutual, Northwestern Mutual, and Principal. Most personal disability insurance policies sold are long-term coverage, but some companies also offer short-term insurance.
Buy your own disability insurance
If your workplace doesn’t offer any or sufficient disability coverage, or if you’re self-employed, consider purchasing insurance. Employer-provided disability insurance typically only pays a portion of your base salary up to a maximum amount. If your salary significantly exceeds the maximum amount or you rely on bonuses or commissions, you may want to supplement that coverage.
Insurance companies will also take your other disability insurance into account when deciding how much coverage you can buy, and generally, all of your coverage combined shouldn’t replace more than 75% of your income, Hoffman says.
Purchasing your own policy allows you to:
Customize your coverage with add-ons like annual cost-of-living adjustments
Choose the insurance company that offers the best service
Keep your coverage up even if you change jobs. If you leave your job, your employer-paid coverage ends. (You may still be able to get disability insurance through your workplace if you pay the full premiums.)
We control your disability insurance. As long as you pay your premiums, your coverage remains in place. However, if your employer stops providing disability benefits, your employer-provided coverage ends.
If you become disabled, you receive benefits tax-free. If your employer pays the premiums, you will have to pay tax on the benefits.
According to the Disability Awareness Council, the annual price of long-term disability insurance typically ranges from 1% to 3% of your annual income. A variety of factors affect the cost.
Age and health: The older you are and the more health problems you have, the more you will pay.
Gender: Women tend to file more claims and therefore usually end up paying more.
Smoking status: If you don’t smoke, you’ll pay less
Occupation: If you work in a job that puts you at high risk of injury, your premiums will be higher.
Defining disability: The broader your definition of disability, the more expensive your premiums will be. Insurance that covers you if you can’t work in your current occupation but can earn an income in a lower-paying job will cost more than insurance that covers only if you can’t work at all.
The length of your waiting period: This is called the exclusion period. You can reduce your premiums by waiting longer before benefits begin.
Income: The more income you need to protect, the higher your premiums will be.
Benefit period: The longer the period for which benefits will be paid if you become disabled, the higher the premiums you will pay.
Additional features: Additional features, such as cost-of-living adjustments to protect against inflation, can increase premiums.
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Four questions to ask yourself
When considering purchasing long-term disability insurance, Hoffman suggests asking yourself these questions:
1. If I became disabled and could no longer work, how much of my income would I need to replace to stay afloat?
Your answers will determine which monthly benefit you choose.
2. How long can I wait for my disability benefits to be paid?
This determines your “deductible period,” or the number of months you must wait after becoming disabled before your insurance will pay out. A typical deductible period is 90 days, but you can choose a shorter or longer period. The longer the deductible period, the cheaper your premiums will be.
3. How long do you want the benefits to last?
For occupations like plumbers and carpenters, most policies limit benefits to five years, Hoffman says. If you have a desk job, you can choose to stay insured for a certain number of years or until a certain age, such as 65. The longer the period, the higher the premium.
4. How broadly do you define “disability”?
Highly skilled people who have invested a lot of money into their training may want insurance that will pay out if they are no longer able to work in their specialty. For example, a neurosurgeon who loses their surgical skills may be able to teach or work as a general practitioner, but these jobs pay much less than a career as a surgeon. Another consideration is whether you want insurance that will pay out a portion of your benefits if you become partially disabled and can only work part-time. Hoffman recommends this option because people who become disabled often have to reduce their hours before an illness makes them worse, or after they recover from an injury or illness.
If the price quote is too high, adjust your benefits. Hoffman recommends:
First, extend the waiting period before benefits are paid.
As a last resort, reduce monthly benefits
Characteristics of Employer-Sponsored and Individual Disability Insurance
Employer-paid disability insurance
Personal Disability Insurance
Your coverage is transferable (your coverage will continue even if you move to a new job)
Free or low-cost insurance
Customize your rewards to suit your needs
Insurance payments are taxable
Choosing an Insurance Company
Other Ways to Find Disability Insurance
The following programs also offer financial assistance if you have a disability, but there are limitations:
Social Security does pay disability benefits, but qualifying for them is difficult and time-consuming, and the benefits are low: The average monthly disability benefit in 2017 was $1,172.
State disability insurance programs are available in California, Hawaii, New Jersey, New York and Rhode Island. These programs offer short-term disability insurance, and in most cases, cover up to six months, according to insurance industry trade group Life Happens.
Workers’ compensation insurance pays for a portion of your income if you become disabled due to a work-related injury. All states require employers to provide workers’ compensation insurance for their employees. However, most long-term disabilities are not caused by work-related injuries.
While these programs are helpful, they don’t fully cover the risk of illness or injury preventing you from working. Disability insurance is a smart choice to provide a safety net for the future.