United States: How Disability Insurance Protects Your Finances From The Unexpected

Last Updated: August 8 2017
Article by David White

Even when an employer provides long-term disability insurance, the amount of that coverage may not meet employees' living costs. This article stresses the importance of having adequate coverage, which may necessitate buying an individual policy. It covers the associated costs and potential benefits.

When a friend was seriously injured in an auto accident and faced at least several months of rehab and recovery, it got Janie and Douglas thinking. How would they cope financially if one of them were disabled for a long period? For the average person, you are more likely to become disabled than you are to die prematurely. Meaning, in many cases, disability insurance is more useful than life insurance.

Janie's employer offered some coverage, but the couple doubted it would be sufficient. Douglas was self-employed and did not have long-term disability (LTD) coverage. He was worried that he would have to pay high premiums to buy insurance on his own. The spouses sat down with their financial advisor, who stressed that, because their biggest asset was their ability to earn, they needed to look into getting more LTD coverage.

The difference between STD and LTD, STD starts relatively quickly after you are injured, i.e. ten days or two weeks and continues up to a year or more. LTD starts much later say six months to a year, after injury, but continues for a longer period of time, up to age 65. These factors are determined by the specifics of your individual policy.

Individual Policies Offer More

Like Janie, you may have some coverage through your job. Most people receive short-term disability coverage, for injuries and illnesses lasting anywhere from two weeks to two years, as part of their employer's benefits package. Less common, but no less important, is long-term coverage. However, even when an employer provides long-term coverage, the amount of that coverage often is inadequate to meet living costs.

If your employer does not offer disability insurance, or provides less than adequate coverage, or if, like Douglas, you are self-employed, consider buying an individual policy. This type of disability policy may actually offer several important benefits not provided by group coverage. For example:

  1. It is portable, meaning your policy will stay in force even if you leave your job.
  2. Disability income received from an individual policy is income tax free, as long as you pay the premiums yourself.
  3. An individual policy allows you to decide how much coverage you need.

Cost is a Consideration

The main drawback of buying your own disability insurance policy is that coverage can be expensive. Many factors go into determining the cost, such as your age, current health status and the amount of coverage you want. Establishing disability insurance when you are younger and healthier can be a great investment in protection of your future nest egg.

Generally, the older you are or the longer your desired coverage period, the more you can expect to pay in current premiums. Also influencing your policy cost is whether your insurer is permitted to raise your premiums. Non-cancelable policies prohibit cancellation as long as you keep paying your premiums. The length of your elimination period, or how long you must wait before you begin to receive benefits after a disability, will further factor into the cost of your policy. When considering your elimination period, be sure to include your emergency funds and if you wish to exhaust these prior to starting your payout.

Conventional wisdom says you should obtain coverage for 50% to 60% of your net income. But that does not mean you would be happy with that payout. For most people, this will not be sufficient to cover your monthly expenses. It is very important to calculate your minimum living expenses as part of the process of acquiring insurance. You want to insure that you not only cover your minimum expenses, but provide enough money to continue your current lifestyle. Because there is no single right answer for everyone, sit down and calculate how much money you would need each month to meet all of your expenses. If you are not the primary breadwinner, you may not require additional insurance; each case varies based on your needs. The governmental Supplemental Security Income (SSI) program should also be considered as there are no premiums. The process for qualification is longer and the benefits may be smaller; however, any benefits you receive from private insurance do not affect your SSI benefits. Additional monthly income outside of disability insurance may affect your eligibility.

You may be able to save money by not duplicating benefits you already have. For example, if your employer provides short-term disability coverage for one year, you might want to set your policy's elimination period for at least that long. However, a word of caution: Trying to save money by skimping on coverage is probably not in your best interest. Less expensive policies often lack important protections and may severely restrict your benefits. Your worst-case scenario would be to suffer a disability and then find yourself without the protection you thought you had purchased.

Averting a Potential Crisis

The bottom line is that you never know when an injury or illness might affect your income-earning ability, as it did Janie and Douglas's friend. Assess your disability insurance coverage now so that you can take steps to avert a financial crisis and help ensure your family remains secure whatever fate throws your way. If you think you need to purchase an individual policy, talk to your financial or insurance advisor for more information.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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David White
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