What Is Disability Insurance and Do You Really Need It?
Have you ever witnessed friends or colleagues facing health issues that rendered them unable to work for several months or even years? It’s disheartening to see others struggle to make ends meet during challenging times. And it’s even more unsettling to think about what it would mean for you and your family if you were in their shoes.
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Imagine the stress, frustration, and fear that would accompany a loss of income. Fortunately, there is a way to fill this gap in your financial safety net – long-term disability insurance.
Reading: Who should have disability insurance
Understanding Disability Insurance
In essence, disability insurance provides coverage for a portion of your earnings in the event that an illness or injury prevents you from working. The younger and healthier you are, the easier it is to qualify for a policy. However, as you age, your premiums increase, and if your health deteriorates, finding an affordable policy becomes more challenging.
Contrary to popular belief, disability insurance doesn’t solely cover freak accidents. Most claims are for conditions that might not be readily recognized as disabilities, such as physical injuries, heart attacks, or cancer. These unforeseen circumstances can happen to anyone, regardless of their workplace.
Why You Need Disability Insurance
Think disability won’t happen to you? Think again. According to the Social Security Administration (SSA), one in four individuals in their twenties will experience a disability lasting 90 days or longer before reaching the age of 67. Shockingly, 68% of non-government workers lack disability insurance coverage. That’s a significant risk!
Securing long-term disability insurance is not only crucial for your own well-being but also for the financial security of those who depend on your income. Just imagine the peace of mind knowing that money will continue to flow while you focus on recovering.
Exploring Different Types of Disability Insurance
Currently, two primary types of disability insurance dominate the market: short-term and long-term coverage. Both types serve the same purpose by replacing a portion of your monthly salary. However, they differ in several aspects that are worth considering:
Short-Term Disability Insurance
- Coverage: Approximately 60-70% of your salary.
- Duration: Typically lasts 3 to 6 months, depending on the policy.
- Cost: Usually 1-3% of your annual income (yet tends to be more expensive than long-term coverage).
- Payment Timing: Expect your first payment within two weeks of the disability confirmation.
- Recommendation: Only opt for short-term insurance if your employer provides it at no cost to you.
Long-Term Disability Insurance
We firmly believe that long-term disability insurance is the superior choice. But how long should it last? Any policy extending beyond two years until retirement age qualifies as long-term coverage (though you can extend it into retirement if desired). Regardless of whether you work at a desk or a construction site, it’s wise to have coverage until the age of 65.
For maximum protection, aim for coverage at around 60-70% of your income. If you purchase your own policy, it will remain with you regardless of job changes. However, it’s more cost-effective if available through your employer (as you’ll need to prove employment income to file a claim). Consult your human resources department to set it up.
When analyzing the numbers, it becomes clear that long-term disability insurance is the superior option. We recommend securing coverage for at least 5 years or more to address potential long-term income loss that a 3-6 month emergency fund cannot fully cover. The only downside is the elimination period, with an average claim processing time of around 90 days.
Short-Term Disability Insurance: A Brief Solution
As the name suggests, short-term disability insurance offers temporary protection, with payments typically lasting from a few months to a year. The elimination period is shorter, usually around two weeks, resulting in faster payment compared to long-term coverage. However, short-term premiums are generally similar or slightly higher than long-term premiums.
If your employer doesn’t provide short-term coverage free of charge, it’s advisable to forgo it. Instead, you can create your own short-term disability coverage by saving 3-6 months’ worth of expenses in an emergency fund. This way, your savings can bridge the financial gap while you recover from an illness or injury.
Understanding the Cost of Disability Insurance
Disability insurance costs, commonly known as premiums, typically range from 1% to 3% of your annual income for both short-term and long-term coverage. For instance, if you earn $50,000 per year, your monthly premiums may amount to $60 to $125. Opting for a long-term policy with a longer elimination period can reduce the cost. Consider a “non-cancellable insurance policy” for added security, as it cannot be canceled by the insurance company even if your health deteriorates.
See also : Eligibility and Cost
Several factors influence your monthly premium, such as age, smoking status, occupation, and income level. Naturally, higher earnings lead to increased premiums as protecting substantial income requires a higher investment. Additionally, the specific definition of disability within your policy can impact the cost. Specialized coverage tailored to specific occupations may be more expensive than policies covering general office jobs.
Who Requires Disability Insurance?
The simple answer is: everyone! Regardless of your profession, whether you’re a high-rise window cleaner, a car salesman, or anything in-between, having long-term disability insurance is crucial. Although individuals working with heavy equipment face higher risks, it’s unwise to forgo protecting your income for the long haul.
For high-risk occupations like firefighters, police officers, or shark handlers, disability insurance premiums will naturally be higher compared to less risky jobs such as telemarketing.
Fortunately, disability insurance is commonly provided as a benefit by employers in high-risk industries. Remember, however, that disability insurance isn’t meant to make you rich; its purpose is to cover bills and provide sustenance for your family in case something happens to you.
What Disability Insurance Doesn’t Cover
While disability insurance replaces a portion of your income, it doesn’t extend coverage to additional expenses like medical bills and long-term care costs. Pregnancy is generally not covered by long-term policies, although complications that extend beyond the pregnancy may qualify for benefits if you had a long-term policy before becoming pregnant. Short-term policies cover birth-related disabilities, but there may be a waiting period of six to eight weeks between payments.
How to Acquire Disability Insurance
Start by checking if your employer offers a long-term disability insurance plan. If not, reach out to an insurance professional for guidance. We recommend Zander Insurance, endorsed by Dave Ramsey himself. The team at Zander will assist you in navigating the process and ensure that you obtain the appropriate amount of disability insurance for your specific needs.
Dealing with a disability is challenging enough without the added worry of financial obligations. Protecting your income with the right disability insurance is vital for safeguarding your family and securing your future. To explore the best disability insurance options for you, try using our new Coverage Verification Tool today.