Can you afford to go without income for an extended period?
Disability insurance pays part of your income if you cannot work because of an illness or injury. You might think that the chances of missing months of work are slim. However, the numbers might surprise you. Nearly 1 in 4 young adults will be disabled before they reach 67.
Can you afford to go without a paycheck if you suffer an accident or major illness such as a car accident, a heart attack, or a cancer diagnosis? Or what about if you have to have a surgery that keeps you from working for several weeks to several months?
There are two types of disability insurance: short term and long term. While your employer might offer short-term benefits, what happens after that? And what if your employer doesn’t offer it? Let’s explore both types of policies and find out if one, or both, are right for you.
Short-term disability insurance
In 2018, according to the Bureau of Labor Statistics, only 42% of private industry workers had access to short-term disability insurance provided by their employer. The rate for state and local government works is even lower.
If your employer offers it, participate. If not, you might consider purchasing your own policy. Let’s look at the facts and figures:
- Short-term disability usually replaces 60% to 70% of your income
- It pays out for a few months to one year, depending on the policy
- There may be a waiting period before benefits are paid
- The cost of a policy varies, depending on the length of benefits and other factors
Should you purchase a short-term disability policy? Unless you have an emergency savings fund for such purposes, a short-term policy will cover you until your long-term policy kicks in.
Long-term disability insurance
Long-term disability insurance kicks in after a waiting period, usually 90 days. However, depending on your policy, it can be as much as 360 days. This is where the short-term policy comes in handy.
Some employers offer long-term disability, and for older workers, this can be your best option. But if your employer doesn’t offer it, or even if they do, it might be better to buy a private long-term disability policy:
- Just like life insurance, long-term disability insurance is less expensive when you’re young.
- Not all employers will offer it.
- You can carry it from job-to-job and even into retirement.
- If you later want to convert your employer’s policy to a private one, it can be prohibitively expensive.
- You can customize your coverage with add-ons for things like annual cost-of-living adjustments.
- You can find the best policy at the best price.
- You control when your policy ends, not the employer.
- You can collect tax-free benefits. If your employer pays for part of the coverage, you have to pay taxes.
What does a long-term policy cover?
- It usually replaces 40% to 60% of your salary.
- Depending on your policy, benefits end when the disability ends, but if the disability continues, your benefits end after a certain number of years or when you reach retirement age.
Long-term disability insurance is the least expensive way to protect your income if you’re injured or become ill.
When considering long-term disability insurance, ask yourself these questions:
- How much of your income would need replacement? Use this answer to decide the monthly policy benefit.
- How long can you afford to wait before benefits start? This answer will decide the waiting period, and if you should add a short-term policy.
- How long do you want the benefits to last? Depending on your occupation, you may be limited in the length of benefits. For example, plumbers and carpenters usually get five years. If you work at a desk job, you can choose a particular number of years or for the policy to end at a certain age.
- How do you define disability? If you are a highly skilled person, you may want a policy that pays out if you can’t work in your specialty. For example, a surgeon who loses the ability to operate may be able to find a teaching position, but it pays much less, so a policy with a partial-disability provision might be needed.
The cost of disability insurance
The cost of all disability insurance, whether short-term or-long-term, is calculated using several factors, including age, income, and profession.
In general, the average cost of either type of disability insurance is 1% to 3% of your annual gross income. So, a person making around $100,000 a year in gross income will pay about $1,000 to $3,000 per year, assuming the person is under 45 and has a job with minimal risks.
Premiums can cost as much as 15% of annual gross income if you’re over 45 or in a high-risk job, such as a construction worker or airline pilot. However, if you’re under the age of 30 and work in an occupation with less risk, you’ll pay less than 1% of your annual gross income.
Other factors that contribute to policy cost
- Age and health
- Gender: Women usually pay more because they file more claims
- Length of the waiting period: A longer waiting period generally means lower cost
- Income: The more income you protect, the higher the cost
- Length of benefits: The longer the period that the policy promises to pay out if you become disabled, the more you’ll pay in premiums
- Add-ons: Can increase the premium
Alternative disability insurance
There are programs that offer financial help in case of a disability, but they have disadvantages.
- Social Security pays disability benefits but qualifying is both difficult and time-consuming. The average monthly benefits are very low, with the average in 2018 $1,172 per month.
- California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico offer state-sponsored programs. They provide short-term disability coverage, in most cases, for up to six months.
- Workers’ compensation insurance replaces a portion of income if you’re disabled because of a work-related injury. Most long-term disabilities wouldn’t be covered because they’re usually not the result of work-related injuries.
These programs can help, but they don’t fully cover the risks. Disability insurance is a smart investment that provides a safety net for your future.
Avante can help provide a secure future when the unthinkable happens
No one ever thinks they will suffer a catastrophic illness or injury, but just like you prepare for damage to your home with homeowner’s insurance, you need to protect your most important asset: yourself and your income.
The ins-and-outs of disability insurance are complicated, as you can see. Let Avante help you make the right decisions to safeguard your future – contact us today.
This blog and website are made available by the publisher for educational and informational purposes only. It is not to be used as a substitute for competent insurance, legal, or tax advice from a licensed professional in your state.