It is easy to imagine experiencing a house fire and needing homeowner’s insurance. We have also heard horror stories of the consequences of not having enough life insurance. While these protections are certainly necessary, do not neglect the importance of insuring your income. Your ability to earn money is your most powerful asset, and it’s not even close. The average high school graduate is expected to earn just under $1 million over their working career.
According to the Social Security Administration, 1 in 4 workers over the age of 20 will experience the need for income protection. This kind of protection is called disability insurance. Despite its importance, I find that most people are unaware of the specifics of their disability insurance unless they have been faced with the possibility of needing the coverage. If you ever need to make a disability claim, it quickly becomes clear that the specifics matter. Here are some questions you need to ask yourself to make sure you have adequate coverage.
Group Or Individual Coverage?
Many people work for employers who provide disability insurance as an employee benefit. Being part of a group plan has some advantages. Generally, your premiums are lower, your company has researched the policy for you, and many times you are not required to have a medical exam. However, your coverage may end when your employment ends.
Having your own policy can have advantages as well. Although you must qualify medically, coverage remains in force if you pay your premiums. You can tailor your coverage to your specific needs or often get a more comprehensive policy. Since individual policies are paid with after-tax dollars, the benefits paid are tax-free. On the other hand, you will have to pay federal income taxes on your benefits if you are covered at work and your employer pays the premium.
How Much Income Can You Insure?
One long-held theory regarding disability insurance asserts that an insured would have little incentive to recover from an illness or injury if their policy paid a benefit equal to 100% of their salary. For that reason, most policies cover between 60% – 70% of your income. Group policies often cover 50%-60%. In those cases, it may be worth it to consider purchasing supplemental coverage to get you closer to 70%.
The Waiting/Elimination Period
This is the time between when you become disabled and when you start collecting benefits. During the waiting period, no benefits are paid to you.
· For short-term disability insurance provided by your employer or the state, the waiting period can range anywhere from 0 – 14 days.
· For long-term disability group or individual policies, the waiting period can range anywhere from one month to a couple of years. The longer it is, the less you (or your employer) generally pays in premiums. As a rule of thumb, the 90-day waiting period is usually the most cost efficient.
The Benefit Period
Short-term disability policies generally are provided by your employer and can pay for up to 52 weeks. Long-term disability policies pay for a specified number of years as outlined in the terms of the policy. This number of years is called the benefit period. Some common benefit periods are 2 – 5 years, with the most comprehensive policies paying until age 65.
Doesn’t Social Security Provide Me With Disability Coverage?
Yes, but…
· It doesn’t cover short-term disability or partial disability. Your disability must be TOTAL – expected to last at least one year or result in your death.
· It’s difficult to qualify for. More than half of all initial disability claims are denied by the Social Security Administration.
· If you are approved, there is a five-month waiting period before benefits begin.
What About Workers’ Compensation?
Workers’ compensation only pays benefits if your disability is work-related (i.e., injured on the job), so it offers only limited disability protection. How much you get and what disabilities are covered varies by state.
Don’t Take Your Health For Granted
If it isn’t obvious by now, disability insurance does not put you back to the level you were before. Staying healthy makes it easier to achieve the financial goals you have set out to do. To the extent that you can, take every opportunity to care for yourself. Make sure you are following the best practices for preventative care like scheduling your annual check-ups. If your employer offers wellness initiatives, take part in them because good health is priceless.
Despite all of this, even the healthiest of us can get seriously sick or injured. Sometimes there’s nothing we can do about it, but we can prepare for the financial impact a disability may create for us. If you have coverage through your employer, it might be a good time to review the details of the plan (the waiting period and the percentage of income your policy will replace). If you don’t have coverage through work, think about what a long-term absence from work will mean to your finances. The cost of the premiums might be well worth the coverage you’ll get if you do become disabled.
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