Disability insurance pays a portion of your income if you can’t work for an extended period because of an illness or injury.
Why you need disability insurance?
The chance of missing months or years of work because of an injury or illness may seem remote, especially if you’re young and healthy and you work at a desk.
But more than one in four 20-year-olds will experience a disability for 90 days or more before they reach 67, according to the Social Security Administration.
“You never think it’s going to be you,” says Carol Harnett, president of the Council for Disability Awareness, an insurance industry group.
More than one in four 20-year-olds will experience a disability for 90 days or more before they reach 67.
One reason people shrug off the risk is they think about worst-case scenarios, such as spinal cord injuries leading to quadriplegia or horrific accidents that result in amputation, Harnett says. But back injuries, cancer, heart attacks, diabetes and other illnesses lead to most disability claims.
“The questions people have to ask are, ‘What would you do if you couldn’t work? How far could you go without a paycheck?’ ” Harnett says.
Types of disability insurance
There are two main types of disability insurance — short-term and long-term coverage. Both replace a portion of your monthly base salary up to a cap, such as $10,000, during disability. Some long-term policies pay for additional services, such as training to return to the workforce.
Disability policies vary in how they define “disabled.” Some policies pay out only if you can’t work any job for which you’re qualified. Others pay out if you can’t perform a job in your occupation. Some policies cover partial disability, which means they pay a portion of the benefit if you can work part time. Others pay only if you can’t work at all.
Buying your own disability policy
Consider buying a policy if you don’t have any or enough disability coverage at work or are self-employed. Employer-sponsored disability insurance usually pays only a portion of your base salary, up to a cap. It’s a good idea to supplement that coverage if your salary far exceeds the cap or you depend on bonuses or commissions.
An insurer will consider other sources of disability insurance to determine how much coverage you can buy. Generally, you can’t replace more than 75% of your income from all the coverage combined, Hoffman says.
Buying your own policy lets you:
Customize the coverage with extra features, such as annual cost-of-living adjustments
Choose the insurance company with the best offerings
Keep the coverage when you change jobs. Employer-paid coverage ends when you leave the company. (You might be able to take the coverage if you pay the full premium for disability insurance offered through the workplace.)
Control the disability insurance. The coverage stays intact as long as you pay for it. But employer-sponsored coverage will end if the employer decides to stop providing disability benefits.
Collect benefits tax-free if you become disabled. If the employer pays for the coverage, you must pay taxes on the benefits.
The annual price for a long-term disability insurance policy generally ranges from 1% to 3% of your annual income, according to the Council for Disability Awareness. A variety of factors affect the cost.
Your age and health: You’ll pay more the older you are and the more health problems you have
Your gender: Women usually pay more because they tend to file more claims
Whether you smoke: You pay less if you don’t smoke
Your occupation: You’ll pay more if you work in a job with a high risk of injuries
The definition of disability: The broader the definition of disability, the higher the premium. A policy that covers you if you can’t work in your own occupation but could earn income in a lower-paying job will cost more than a policy that covers you only if you can’t work at all.
Length of waiting period: This is known as the elimination period. You can reduce the premium by increasing the waiting period before benefits kick in.
Your income: The more income you have to protect, the more you’ll pay for coverage
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
Extra features: Additional features, such as cost-of-living adjustments to protect against inflation, will increase the premium