In the event of a disabling injury or illness and are unable to work, there are a number of sources for disability insurance benefits that people might tap into. Just be mindful that there are limitations on the benefits available through these sources and sometimes the benefits won’t be sufficient to meet your income replacement needs. In such instances, many people consider buying additional coverage, either through the workplace or on their own.
Group Coverage
The main source of disability income protection in the U.S. is coverage provided or sponsored by employers. Many employers, especially larger ones, provide their employees with group insurance coverage. There are two forms—short-term disability (STD), which replaces a significant percentage of income for about three months in most cases, and long-term disability (LTD) which typically pays 40 percent to 60 percent of base salary (pretax) for longer periods.
Often, employees are given the option to add to the baseline coverage that their employer provides. Some companies don’t provide disability coverage but help their employees by giving them the opportunity to purchase coverage on a voluntary basis.
With this type of program, employees, rather than the employers, pay the full cost of the coverage. A benefit of purchasing disability coverage at the worksite is that it’s generally easier to qualify for than coverage you purchase individually. An employer’s human resources department or benefits manager can provide information on what coverage and purchase options a company’s plan provides.
Private Disability Insurance
The most flexible and reliable source of coverage is an individual disability insurance policy purchased outside the workplace. A privately owned policy is portable, so policyholders won’t have to worry about losing coverage if they change jobs. Generally, most individual plans will pay between 40 percent to 65 percent of the workers gross salary before the disability occurred. When the premiums are paid with after-tax dollars, benefits are received income-tax free.
Workers’ Compensation
If a disabling illness or injury while at work results in a loss of work, Workers’ Compensation insurance might replace some that lost income. All states require employers to provide Workers’ Compensation coverage. It typically pays about two-thirds of predisability income. However, it only pays in cases where an illness or injury is related to work. The vast majority of long-term disabilities—90 percent, according to the National Safety Council—are not job-related.
Disability Insurance Programs
A handful of states provide short-term disability coverage—typically for up to six months—that workers pay for through a payroll deduction. They are California, Hawaii, New Jersey, New York and Rhode Island, as well as Puerto Rico. For those who live in these states, this can be an important source of short-term income replacement.
Social Security
The federal government administers a disability insurance program that covers most workers, but qualifying for benefits is far from a sure thing and the payment levels (determined by an individual’s salary and work history) are fairly modest. Currently 65 percent of applications for Social Security disability benefits are initially denied, and the average monthly payment of current beneficiaries is $1,065, which is barely above the poverty line.
