What is disability insurance?
Disability income insurance replaces lost wages in the event of sickness or injury. As
such, it is a critical component of the overall plan to protect your income during your working years. Yet as with life insurance, relatively few—less than 30% of workers—have
any private coverage. What many consumers do not know, is the risk of becoming
seriously disabled during working years far outweighs the chance of death:
- Women have a 24% chance of becoming disabled for 3 months or longer during working years, and a 38% chance that the disability will last 5 years or longer.
- Men have a 21% chance of becoming disabled for 3 months or longer during working years, and a 38% chance that the disability will last 5 years or longer.
The reasons people don’t purchase disability insurance generally include:
- Too young
- I don’t have a family
- Spouse or significant other is working
- Too expensive
- More important priorities
The above reasons may make borderline sense from a risk point of view, particularly if you don’t think you will become disabled, but have you thought about an unexpected serious disability from a consequence point of view?
It starts with an assessment of who and what is important to you.
- The “who” is, hopefully, your family—those you invited into your life and promised to take care of.
- The “what” is lifestyle, or more simply, the financial commitments you have made to them.
There is little doubt that you understand what would happen to your ability keep these promises if you became disabled during your working years … However, that’s assuming you believe you could.
Like many healthy consumers, you likely believe that the risk is … Zero. So the thought is, “If I am not going to become seriously disabled during my working years, how can it effect my family? If that’s the case, why spend money on insurance?”
If you look at it from a statistical point-of- view, the above objections make sense. Another way of thinking about it is that your family is not a statistic—they are an inseparable part of your life, and because of that you have become indispensable to them. Therefore, you may want to consider an unexpected disability, not as a risk that is unlikely to happen to you, but rather a life-changing event that has serious emotional, physical and financial consequences to those you love. If you ever become seriously disabled, it’s your family that will suffer the consequences.
What types of coverage are available?
There are two basic types of disability coverage, “individual” and “key person.”
Individual Disability Coverage (there are two subsets):
- Short term Disability: Provides immediate coverage for no more than 1 year. It may make sense if:
- You do not want your coverage tied to your job.
- You have a disability plan through your employer, but there is a waiting period.
- You want to keep premiums low.
- Long-term Disability: As the name implies, the coverage can generally last up to age 65. These policies require documentation from your doctor that explains your condition and estimates how long you will be unable to work. There is generally a waiting period of between ninety days to a year, before benefits are paid.This type of coverage is also available in a group setting, typically through your employer. Regardless of the type, you will generally get a set percentage of your wages.
Key person disability
Also referred to as business overhead expense, this coverage protects a company from the loss of a key employee, due to disability, by paying for expenses such as rent, employee salary and other regular monthly expenses.
Regardless of the type of coverage, payments generally represent 60% of your pre-disability wage. Benefits are generally capped at between $15,000 – $25,000 per month. However, some carriers have so-called “high limit” coverage, which could pay up to $100,000 per month.
Regardless of the type, they do share common provisions, including:
- Non-cancelable: the carrier cannot cancel the policy even if you go off a claim.
- Guaranteed renewable: You have the right to renew the policy without future underwriting.
Is it better to buy direct or from an agent?
If you are looking for basic coverage, buying direct or from your employer may make the best sense. However, you should be aware of how private insurance interacts with social forms of coverage. There are two: social security disability income (SSDI) and supplemental security income (SSI):
- SSDI is a federal entitlement program. That is, you are entitled to it if you have enough credits—generally 40—earned by working. Many carriers will offset what they pay you from a long-term disability policy, with what you receive from SSDI.
- SSI is a federal needs-based program. Your income must generally be less than $2,000 per month.
There are a number of options as well, including:
- Cost of living adjustment
- Partial disability option that allows you to return to work and still receive a benefit, although reduced
- Return of premium if no claims have been made
- Waiver of premium if you are disabled for a certain period of time
For these reasons it makes sense to work with a Verified Agent in your community.