Have you ever thought about what would happen if your income was to stop suddenly? You rely on your income to pay bills, save for retirement and even pay for entertainment. Unfortunately, for many individuals, their income stops in an instant and they are left trying to figure out how their expenses are going to be paid.
Who Needs It?
If you work and have people relying on your income (including yourself), you should consider getting disability insurance. Could you go weeks without a paycheck? How about months or even years?
If you are young and healthy, disability is probably the furthest thing from your mind. It is difficult to imagine not being able to work. According to the Social Security Administration, more than 1-in-4 young individuals will find themselves disabled before reaching retirement age.
It does not matter if you are a warehouse worker or a salesperson, a disability can happen to anyone at anytime. Sure, if you are working at a higher risk job like a firefighter or police officer, you could be more prone to injury. But you also could be at risk if you sit behind a desk all day and sustain an injury which keeps you from working.
What Is It?
Disability insurance is coverage that will partially replace your income if you cannot work due to an injury or ailment. Typically if you are younger and healthier, it is far easier to qualify for a disability policy than if you are older with more medical conditions. You may qualify for a policy at an older age, but you will pay a higher premium. You can typically get a disability insurance plan three ways:
- Individual policy. You purchase this type of policy on your own. One plus is that if you leave your job, you also take your individual disability policy with you, since it is not connected to your work.
- Group plan. You purchase this policy through an employer or organization. Typically, these are cheaper than individual policies, but if you leave your employer or organization, you also lose this plan.
- Employer-sponsored group coverage. Your employer pays all or part of the premiums for this type of plan. These type of plans are typically cheaper than Individual or Group plans, but you also do not get to take this coverage with you if you leave your employer.
Types of Disability Insurance
When it comes to disability, there are 2 main types of disability insurance – Short-term and Long-term coverage. Each type of disability coverage has differences that we will discuss.
1. Short-Term Disability Insurance (STDI)
Short-term disability insurance, also known as STDI, typically will replace around 60-70% of your base salary up to a certain cap (which depends on your policy). It usually lasts around 3-6 months, but sometimes can last up to a year, depending on how the policy is structured. Once a doctor confirms your disability, it typically takes around two weeks until you receive your first benefit payment from STDI.
2. Long-Term Disability Insurance (LTDI)
Long-term disability insurance, also known as LTDI, typically will replace around 40-60% of your base salary up to a certain cap. Sometimes you will find policies that will replace as much as 70% of your salary. LTDI policies typically last five years or longer, depending on the policy, and can sometimes last until retirement age. Once a doctor confirms you disabled, you typically have to wait 3-6 months until you receive your first LTDI payment.
Cost
For an individual policy, disability insurance costs for both short-term and long-term coverage may cost between 1 and 3 percent of your annual income. Other factors that affect your cost include:
- Age
- Health
- Gender
- Occupation
- Income
- If you smoke
- Length of benefits
For a group policy, disability insurance costs about 1 percent of your annual income. It is easier to qualify for group disability insurance than for an individual disability policy.
Employer-sponsored group coverages are usually the cheapest out of the 3 options and cost about 0.5 percent of your annual income, but they are taxed. There are times when the employer will pay the entire cost for both short-term and long-term coverages.
Alternatives to Disability Insurance
1. Emergency Fund instead of Short-Term Disability
If your employer offers you short-term disability insurance for free or at a low cost, it may be worth getting. Otherwise, you are better off saving and putting money into an Emergency Fund to cover your short-term expenses.
If you want disability coverage, long-term disability coverage is more advantageous for you, based on cost and how long the coverage lasts. With short-term disability, your costs are typically around the same as a long-term policy, but with a short coverage period.
2. Social Security Disability
Social Security Disability Insurance, also known as SSDI, is only available to individuals that are deemed totally disabled by Social Security rules. Because of this, qualifying can be difficult and very time consuming to get approved. The average Social Security Disability monthly benefit is $1,233.
3. Workers Compensation
Workers Compensation only pays if a worker is injured on the job and sustains work-related injuries. Employers purchase workers compensation insurance to pay for incidents that happen on the job. Employees who collect payments under workers compensation typically are not considered to have a disability, but rather a temporary injury. Most long-term disabilities are not the result of work-related injuries. Many times, workers compensation payments can take long periods of time to begin.
Summary
Most disability insurance claims are a result of non-work-related injuries and illnesses. You should start by checking with your employer and seeing if they offer short or long-term disability insurance and what it costs, if anything.
Having to deal with a disability and being out of work for an extended period of time is a scary thought. The last thing you want to worry about if you cannot work is how you will pay your bills. It comes down to your own personal needs and you have to decide if disability insurance is right for you.