Disability Insurance

1 in 4 workers will become either too sick or too injured to work over their lifetime, and Getting too sick or too injured to work happens, regardless of whether someone works at a hazardous job or not. When people can’t work, their income is at risk, and therefore it can greatly impact their ability to provide for their families. (Citation link)

What is the definition of a disibility?

Disability refers to when you’re too sick or too injured to work for a defined period of time. Every disability insurance policy has a specific definition of what it means to be disabled in order to qualify for benefits, so talking to your agent and reading the fine print will be important. In technical jargon, the term “own-occupation” means you qualify for disability benefits if you are unable to continue to work in your occupation. “Any occupation” means you are unable to work in any occupation. You can also be “partially disabled” which would be determined, and therefore would have an impact on the benefits you receive from a policy.

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What is Disability Insurance?

Disability insurance is used to provide income benefits to you if you are unable to work and not receiving a paycheck because you are either too sick or injured for an extended period of time. Disability insurance is also known as income protection or income protection insurance. If you have a disability insurance policy then you can use the benefits to pay your bills, just like you normally would from the use of your paycheck.

There are two types of disability insurance; short term and long-term. With short term disability insurance, you’re able to get immediate benefits paid after an accident, as an example. Long term disability insurance provides income replacement for disabilities that last for an extended period of time, like a number of years. Many employers offer some level of disability insurance, but it’s becoming less common for this to be part of employer benefits, and the amount offered is often less than would be needed by many people in the event they needed to claim benefits. Therefore having a private disability insurance policy can be a good idea for many to make sure they can pay their bills while they recover from their injury or illness.

Benefits of Disability Insurance

Unlike what most people think, disability insurance isn’t just to cover accidents. In fact, a majority of long term disabilities are caused by illnesses such as multiple sclerosis, arthritis, lupus, heart disease, and cancer. 1. These are things that are hard to protect yourself from, and if you have a long-term disability insurance policy then it can help provide the financial security you need to take care of yourself and your loved one’s if you’re unable to work.

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What does it cover?

You can use benefits received from your policy to pay for just about anything including:

  • Mortgage
  • Rent
  • Utilities
  • Food
  • Medical bills
  • Credit card bills
  • Car Payment
  • Gas
  • Dining out
  • Other loan payments

How much coverage is needed?

You should have enough coverage so you will be able to pay your bills each month while you’re recovering from your illness or injury. You might need to cut out some of the frills like dining out, or going to the movies or vacations for a while, but having enough coverage to keep your household bills being paid on time should be your goal. So, even if you have a group policy at your place of work, you’ll only typically get 40% to 60% of your salary and it will be taxable. Therefore, your bills may not be covered depending on your lifestyle and needs. If you have an individual policy, then it will typically cover up to 80% of your salary and will usually not be taxed.

Short vs. Long Term Disabililty Insurance

Short term disability insurance, also known as STD, typically replaces 60%-80% of your lost income for a short period of time, which is usually for around 3 to 6 months, and almost never more than a year. This is the type of disability insurance that is sometimes offered by employers.

Long term disability insurance, also known as LTD, typically replaces 60% to 80% of your lost income and offers benefits that are designed to last for many years, including through retirement years if needed, if something were to happen to you and you were no longer able to work.

Consider This….

Short Term Insurance

  • Shorter timeframe (3 to 6 months)
  • Often offered by employers
  • Replaced 60-80% of lost income

Long Term Insurance

  • Longer lasting benefits, ofthen through retirement
  • Usually more cost effective than short term insurance, and includes additional benefits
  • Replaces 60-80% of lost income

How Does Disability Insurance Work

If you have a policy then all you need to do is contact your agent or the insurance carrier to start filing a claim. Some form of proof of an illness or injury will be required as part of the process. A disability policy has five basic features like most other forms of insurance.

 

Premium:

Benefit:

Benefit period:

Waiting period:

This is the amount you pay for the policy. The amount varies based mostly on the length of coverage selected, type of coverage, your individual health, and the benefit amounts (ie. how much you will receive in income protection).

This is the amount of money you will receive each month when you can’t work. Typically this is 60% to 80% of your salary. The good news is this money typically is not taxed if you purchase a policy yourself, but if it’s part of a group plan offered by your employer it will likely be taxed. So keep that in mind when planning for your disability insurance coverage.

This is the length of time you will receive benefits. For short-term disability insurance it’s typically not longer than a year, but for long-term disability insurance it can range for several years up to retirement or until you are recovered.

In the insurance world, this is known as the elimination period and is the amount of time you must wait between putting in your claim and when benefits can be paid to you. The waiting period is usually much shorter for a short-term disability policy than for a long-term policy.

Premium:

This is the amount you pay for the policy. The amount varies based mostly on the length of coverage selected, type of coverage, your individual health, and the benefit amounts (ie. how much you will receive in income protection).

Benefit:

This is the amount of money you will receive each month when you can’t work. Typically this is 60% to 80% of your salary. The good news is this money typically is not taxed if you purchase a policy yourself, but if it’s part of a group plan offered by your employer it will likely be taxed. So keep that in mind when planning for your disability insurance coverage.

Benefit period:

This is the length of time you will receive benefits. For short-term disability insurance it’s typically not longer than a year, but for long-term disability insurance it can range for several years up to retirement or until you are recovered.

Waiting period:

In the insurance world, this is known as the elimination period and is the amount of time you must wait between putting in your claim and when benefits can be paid to you. The waiting period is usually much shorter for a short-term disability policy than for a long-term policy.

Is Disability Insurance worth the cost?

Individual disability insurance is a personal choice and only you can determine whether it’s worth the cost or not based on your situation. As an example, if your policy costs you $125 a month, and you pay it for 10 years before you make a claim, then you will pay $15,000. If you become disabled from your job and have $3,000 of monthly bills and are unable to work for 1 year, then you’ll need $36,000 to cover those bills. If your salary is $50,000, then with an individual policy providing benefits at 80% you’ll receive $40,000, which will be enough to cover your bills. Otherwise, without a policy in place, then you’ll need to make sure you have enough savings.

By the numbers, according to the 2020 Cost of Care survey sponsored by Genworth Financial

$105,850

Median cost of a private room in a nursing faclity in the U.S.

$51,600

Median cost of a private room in an assisted living facility in the U.S. 

$54,912

Median cost of a home health aid in the U.S.

Key Takeaways: 

  • 25% of workers will become disabled in their lifetime and unable to work for a prolonged period of time.
  • Disability insurance isn’t only for people who work a physically demanding job.
  • A licensed agent can help you get the right amount of coverage and at the right price that fits your budget.
  • You can use disability insurance benefits to pay for just about any regular expenses in your life including your mortgage, rent, utilities, cell phone bills, food, or other routine expenses​.
  • If you don’t think you can afford to float your expenses for at least a year or two you shoud consider disability insurance.

FAQ

Can Social Security be use to cover me if I’m disabiled and unable to work?

It can be expensive, but it depends on the type of policy you buy, the coverage you want, and when you buy it.

If you’re young and healthy, or if you don’t think you’ll need much long-term care for some other reason, you’ll probably pay a lot less for one of these policies than someone who is older, has health issues, or has a more likely need for long term care.

My company offers long term disability insurance with up to 60% of income replacement, but I don’t think that will be enough. What should I do?

It can be expensive, but it depends on the type of policy you buy, the coverage you want, and when you buy it.

If you’re young and healthy, or if you don’t think you’ll need much long-term care for some other reason, you’ll probably pay a lot less for one of these policies than someone who is older, has health issues, or has a more likely need for long term care.

I am self-employed so what are my options to purchase Disability Insurance?

It can be expensive, but it depends on the type of policy you buy, the coverage you want, and when you buy it.

If you’re young and healthy, or if you don’t think you’ll need much long-term care for some other reason, you’ll probably pay a lot less for one of these policies than someone who is older, has health issues, or has a more likely need for long term care.