If you rely on your income, you need to protect it with a good disability insurance policy. Many people take this for granted, but consider the economic impact you have to your family:
Annual salary: $50,000
Age: 35
Retire at age: 65
Earned income over 30 working years: $1,500,000
Do you have anything else in your possession that’s worth over $1,5000,000? If you did, wouldn’t you insure it against loss?
That’s what disability insurance does – it protects your ability to earn an income against a loss of that ability. A sickness or injury can prevent us from working, and thereby prevent us from earning the paycheck that covers our rent or mortgage; our car payment; our child’s education; food, utilities… the list goes on and on. Just a quick check of your bank statement showing all the areas your money goes should give you a good sense as to how critical your income is.
How do I receive benefits from a disability insurance policy?
Most disability insurance policies pay a monthly benefit once the insured has satisfied the waiting period, otherwise called the elimination period. The waiting period is the amount of time between submitting your application for disability benefits and actually receiving the disability payment checks. You can choose a longer waiting period and get lower premiums or a shorter waiting period and pay higher premiums.
Typically a waiting period is 30 days but can be as long as three months. Once the waiting period is satisfied, you will receive a check each month until the end of your benefit period (usually until age 65), or until you come back to work.
The question of whether the disability checks are tax-free or not depends on how the premiums were paid for the disability insurance. If you paid the premiums, say via your paycheck funds, then the money used to pay the disability insurance is after-tax income and your benefits will be tax free. If the disability insurance is a perk from your employer and the employer pays the premiums and the benefit is not deducted from your paycheck’s gross income each pay period, then the benefits will be taxable.
What does disability insurance cover?
Disability insurance covers any sickness or injury that prevents you from doing the job you are employed to do. Some examples include injury, The two main options for coverage are short-term and long-term coverage. Both types will pay a portion of your income up to a pre-disclosed cap. Some disability insurance plans will only pay if you are virtually unable to execute any portion of your stated occupation. Some will only pay out if you are deemed unable to obtain work in your field in any fashion. Other disability plans will pay out only if you can’t work any job at all. While some will cover partial disability even when you recover from your affliction enough to obtain part-time employment down-the-line.
Perhaps the most liberal plan for disability coverage can be viewed as “own occupation” coverage. This type of coverage will pay your disability benefit if you have been deemed unable to execute the parameters of your job, just like any other type of disability coverage. However, “own occupation” will continue to pay your disability benefits until age 65 if you are permanently perceived to be unable to regain the ability to deemed unable to execute the parameters of your job duties and are completely unable to regain your ability to do so. “Own occupation” coverage will continue to pay your disability benefits from this lost occupation you will never be able to physically do again, even if you later on find gainful employment in an unrelated field. Although this type of coverage isn’t available for every field of employment, it would be a good thing to look for whenever possible.
How much will a disability insurance policy pay?
Typically, a disability insurance policy will replace about 60% of your gross income. Keep in mind, however, that benefits received from a disability insurance policy are usually tax free, so when compared to your actual after tax take home pay it will be closer to 80% replacement.
If I have LTD coverage at work, do I need an individual policy too?
Perhaps…There are some major differences between LTD that is offered by an employer and individual disability coverage that you can buy as an individual. Among them are the fact that most group LTD policies are taxable when benefits are received. You can get an individual plan to help make up this difference and supplement the coverage you have at work.
When do I start to receive benefits?
Every disability insurance policy has an elimination, or waiting period. This is the amount of time that you have to be out of work before you receive your first check from the insurance company. Think of it like your deductible. The typical elimination period for a long term disability insurance policy is 90 days. You can get elimination periods that are longer or shorter, and your premium will adjust accordingly – longer periods are less expensive, while shorter waiting periods cost you more. Generally, a 90 day waiting period is viewed as the best value, if you can absorb the loss of income for those three months, of course.
How long do I receive benefits?
Most long-term disability insurance policies will pay you until you either come back to work, or until age 65. You can elect to have shorter or longer benefit periods, but to age 65 is the most common.
What is the difference between long and short term disability insurance?
Long-term disability insurance (LTD) and short term disability insurance (STD) refer to the amount of time that the policy will pay you in the event of a claim. Short term disability insurance usually starts paying after only a week or two of being out of work, but only pays for 3 to 6 months of a disability. Long term disability insurance, typically starts paying after 30 days, or as much as 90 days; but then continues paying you until the normal retirement age of 65. We explain this in further detail in our article on the differences between short and long term disability insurance.
Does disability insurance cover maternity leave?
While some group short-term disability (STD) plans that is employer-provided does cover maternity leave as disability, individual STD policies do not cover maternity leave. To learn more about disability insurance and pregnancy, check out our article on Short-Term Disability and Pregnancy.
Should I buy short or long term disability coverage?
As a general rule, it’s better to self-insure the small losses and shift the larger ones to an insurance company; thus long-term disability insurance is usually a more important type of policy. If you were disabled for a couple of months, it certainly wouldn’t be the most pleasant time in your life, but not devastating to your normal way of life. Many people could get by for a short time with a reduced income. However, if a disability kept you out of your job for many months, or even years, this could be a catastrophic situation. Better to have that risk shifted to an insurance carrier under your long-term disability coverage. You won’t be receiving your usual dollar amount per pay period, but you will be sustained with the portion you do receive.
What features should I look for in a good disability policy?
While not all features are available to all occupations, it’s important to look for the following whenever possible:
Own Occupation Coverage
This type of a policy pays you if you can’t do the duties of your own occupation, even if you can do something else. It is the most comprehensive type of policy you can buy.
Non-Cancelable and Guaranteed Renewable
These types of policies are contractually obligated to have premiums that can never change. The price you pay at age 25 will be the same price you pay at age 55. Policies without this type of language reserve the right to increase the cost if they need to, but only in limited circumstances.
Partial/Residual Disability
Be sure to get a policy that contains coverage for partial disabilities. A partial disability is when you’re working in your own occupation, but have a loss of income, and often times a loss of time or duties at your job. Basically, you’re working part-time due to a sickness or injury and have taken a pay cut from your usual salary. A good policy will pay for total or partial disabilities, and since most claims are partial in nature at some point, this is a very important feature to have.
Cost of Living Adjustment (COLA)
This feature makes sure that if you have a claim, your benefits increase each year to keep pace with inflation. They typically base the increase off the consumer price index, up to 3% or 6%. This is an especially important feature if you’re younger and have a potential for a claim that could last many years, or even decades.
Future Increase Options
If you think your income will increase in the coming years, it may be prudent to have a provision in your policy that allows you to increase your disability coverage without having to go through underwriting. Your health at the time of coverage increase will not be considered by the insurance company and they will underwrite the plan with your initial medical information obtained when your policy was first taken out.
A Quality Insurance Company
While not a feature of a disability insurance policy, it is very important to purchase a policy through an insurance company that is highly-rated (A+ or better) by the independent credit rating agencies, like A.M. Best, Standard & Poors, and Moody’s. A good credit rating is important for the company you choose to buy your plan from because of how the insurance companies obtain the necessary funds to pay claims and still make a decent buck. The first thing that happens when someone files a disability insurance claim, is that the insurance carrier puts the future value of that claim into their reserves. Reserves are a very safe place for money that is going to have to be used to potentially pay a claim for however long it might last. If this person is age 25 and has $5000/mo of coverage, that’s many millions of dollars that has to be placed aside for this claim since it may very well last 40 years until the insured turns retirement age 65. It’s important that the insurance company has the financial resources to do this and fulfill the promises that they made to their policy holders.
I still don’t know if I should buy disability insurance.
Insurance needs vary from person to person, case to case. In the end, it is important to think about what would happen if you were to lose your income temporarily, or indefinitely. Could your family get on without your ability to work? Would you suffer from that loss of income? Still questioning whether disability insurance is right for you? Read our article on The Top 3 Reasons to Buy Disability Insurance.
How do I buy a policy?
The first step is to request a free quote and see how much coverage you can qualify for based on your income and the approximate cost of that coverage. You can then select the coverage amount that is best for your situation and that fits your budget.
Once you’ve selected an amount, you can start the application process online, and one of our licensed disability specialists will give you a call to make sure you’re getting the best policy and answer any questions.
