Why might you need disability insurance?
Although many people know the importance of life insurance to protect their loved ones, disability insurance may be equally important. Particularly for younger individuals, who typically haven’t built up significant savings, their ability to earn a living is their single most valuable asset.
Furthermore, your chances of becoming disabled sometime during your working life are over 1 in 4. Most people associate disabilities with accidents and injuries, but other causes are more common, such as major illness, or even arthritis and chronic back pain.
If you were suddenly unable to pursue your line of work and forced to reduce your hours or take a lower-paying job, could you cope? Almost 25% of Americans would begin having financial difficulties immediately, and half would experience difficulties after one month. Disability insurance could help you and your family to minimize financial hardship.
Social Security can provide disability payments as a last-resort safety net, as long as you’ve worked long enough to be eligible, but you have to apply and approval is far from guaranteed. Furthermore, the benefits cover only a fraction (around 25%) of your salary.
What are the main types of disability insurance?
There are three main types of disability insurance.
Group plans. The most common is group plans, which are typically offered through your employer. These come in various levels of coverage. The lowest coverage tier is often extremely affordable, but benefits vary greatly. Group plans typically replace about 60% of your salary, and often place a monthly or yearly cap on the dollar amount you can be paid, or set a maximum time frame for benefits that could be as short as two years. You also may lose your coverage if you leave the company.
Individual plans. You can also purchase disability insurance on your own. Companies will set your rates based on your individual situation and coverage needs. Individual plans are generally cheaper if you’re young and healthy and cost more if you’re older or have health problems. Individual policies offer you more flexibility to set your benefits and time frame, and don’t stop when you change jobs.
Supplemental Disability Plans. These are designed to supplement coverage you may receive from Social Security or your employer’s group policy. For instance, if you have a group plan that will replace 60% of your paycheck, you may be able to obtain a supplemental policy to raise that to 90%.
How can you select a suitable policy?
Here are some things to look for in a quality disability insurance policy.
Insurer’s Reputation. As with all insurance policies, you should consider the insurance company’s reputation and ability to make payouts if needed. Insure.com’s webpage enables you to look at the financial strength rating of an insurer you are considering.
Non-Cancelable and Guaranteed Renewals. Most policies from reputable insurers cannot be canceled by the insurance company and are automatically renewed as long as you pay your premium on time. You should make sure these features are included in your policy.
Benefits Waiting Period and Maximum Payout Time. The amount of time you have to wait for benefits to start and the maximum time that they will be paid are important features of any policy. Extending your waiting time from 30 days to 120 days, for example, will significantly lower your premiums.
“Own Occupation” Coverage. “Own occupation” coverage means the policy will provide benefits if you become unable to perform your current occupation. Some cheaper disability insurance policies may require you to take any job you are physically able to perform, even if it pays appreciably less than your former occupation.
Note that some policies will pay a so-called “residual benefit” which consists of reduced benefits if you return to work but at a lower salary than you previously had.
Cost of Living Adjustments. A useful policy will not only pay out benefits while you need them, but increase the payout as your expenses rise. If your policy is set to pay benefits for years, make sure the payments are indexed to inflation.
Future Purchase Options. A policy with a future purchase option increases the amount of coverage as your salary rises. This can be useful if your career is on the rise or you change jobs often.
There are also some options that apply in special cases.
Business Overhead Expense Coverage. If you own your own business or have recurring business expenses, you may want a policy that covers those as well as your salary. Otherwise you risk foreclosure of your business if you cannot make rent or tax payments.
Retirement Protection and Lifetime Benefits. Most disability policies end when you reach retirement age. But if you plan to continue working and will depend on your salary, you might consider a disability policy that extends coverage beyond retirement age or even for your lifetime.
For additional information
For more information about disability insurance, see these websites.