Think disability insurance is only for accidents and injuries? Think again. Read our comprehensive guide to learn everything you need to know about disability insurance (and if it’s actually worth your money).
Picture this scene:
You’re on a trip with your family and everyone is excited to swim in the nearby river.
With your whole family already in the water, you decide to dive in an area of the river that’s a bit murky.
A few seconds later, you (painfully) realize that there’s a wooden post just right under the spot you picked and your chest makes direct contact with it.
Three broken ribs and a couple of stitches in the E.R later, you lament on the unfortunate event that happened.
Aside from the physical pain, you’re now also worried about missing work while you recover and heal from the injury.
The doctor’s advice? Six weeks up to 2 months of recovery at home.
But believe it or not, he said you’re actually lucky—the injured area was far enough from critical internal organs. A couple of centimeters more and it would’ve ruptured a sensitive organ and lead to something even more disastrous that could take more than a few months to recover from.
The Importance of Disability Insurance
As the family’s breadwinner, the thought of not having any source of income for almost two months is already scary. It’s even scarier to think what would happen if it were to stretch to almost a year (or more)? Pretty hard to imagine, right?
The Social Security Administration revealed in a study that 1 in 4 of today’s 20-year olds will become disabled before reaching age 67.
It means that getting disabled is a lot more common than most people think.
And contrary to popular belief, disability is not only about getting in an accident or a similar unfortunate event. Believe it or not, accidents only represent a tiny portion of overall disability insurance claims.
To get a solid understanding of this whole thing, let’s start with the most obvious question:
What is Disability Insurance?
Disability insurance pays a portion of your income if you get sick or hurt and can’t earn for a certain period of time. It will pay out a check each month based on the amount agreed upon in your policy.
But in order to receive these payments, you will have to pay for the premiums first, just like you would on a regular life insurance policy.
How Does It Work?
Insurance companies will calculate your premium rates based on your age, health, annual income, location, coverage amount, and nature of the job.
Unlike what most people think, disability insurance doesn’t just cover accidents. In fact, the biggest chunk of claims being made is for illnesses, physical injuries, and pregnancies (some women utilize their short-term disability coverage to replace their income while they’re away from work). As you can see, these events are hardly rare and can happen at any time, anywhere.
But while disability insurance was designed to replace lost income, it won’t be able to cover everything as most policies’ maximum benefits are around 60% of your salary. It’s mainly meant to fund your most essential living expenses. Things like medical bills and other care-related costs, for example, are not usually covered by disability insurance.
A good number of employers in the US have some form of disability insurance embedded within their employee benefits. It’s best to check with the H.R department to confirm and review the details. Some will either offer it for free or at a greatly reduced price since they are able to negotiate group benefits pricing with insurance companies.
There are two main provisions that classify how a disability policy will pay the benefits: “Any Occupation” and “Own Occupation”.
Let’s take a quick look at how exactly each provision works.
Own Occupation Disability Insurance
The type of disability policy that will have the insurance company pay the policyholder if they’re not able to perform duties in their current occupation. Let’s say the policyholder is a teacher.
Even if he is able to perform other tasks (e.g jobs that mainly require to sit in front of the computer) while recovering, the insurer cannot deny a claim if the condition rendered the policyholder unable to perform his duties as a teacher.
Any Occupation Disability Insurance
Don’t let its name confuse you—”Any occupation” in this case actually works against the policyholder. How? This type of policy works like a reverse “Own Occupation Disability Insurance”. The insurer can deny a claim if the policyholder is able to perform other jobs outside of their occupation.
For example, the teacher in our earlier example may be denied claims by his insurance company as the latter may argue that even while he is disabled, his current condition allows him to perform other types of jobs (e.g knowledge work, writer, researcher, etc.,).
Unless the disability is severe and makes working completely impossible, some people might not find much value with this type of policy.
How Much Does Disability Insurance Cost?
The amount that people spend on disability insurance usually sits between 1 to 3 percent of their annual salary according to the Council for Disability Awareness. But if you want to know how much exactly you will be paying (in case your current employer doesn’t offer it), you’ll have to request for multiple quotes from various insurers as their answers will vary based on the information you’ll provide such as:
How healthy you are at your current age
As with other forms of insurance, expect to pay more if you’re older and have a few health issues
Your family’s health history
Premiums are likely to be higher if you have a family members that have a history of illness or disease
According to stats, women tend to file claims more often as disability insurance can be used during pregnancy. This is why they typically have higher premiums in general
The type of work you do
A high-risk job (one that exposes you to certain hazards) will naturally have you paying more in premiums
If you are a smoker
Smokers pay significantly more compared to non-smokers
Whether you’re signing up for “Own Occupation” or “Any Occupation” insurance
As we’ve explained earlier, Own Occupation is more preferable compared to Any Occupation as it gives you a better chance of making a successful claim. However, because of this advantage, it also makes it more expensive than the other.
How long is the waiting period
Waiting period (a.k.a elimination period) works exactly like it sounds—the length of time you have to wait before the coverage kicks in. In general, the longer it is, the less you’ll have to pay in premiums.
How much you earn
Since the benefit is based on your income, the higher it is, the more you’ll have to shell out in premiums
Length of the policy
Similar to term life insurance, the longer the coverage, the more expensive the premiums
Other features and add-ons
Extras like inflation protection (cost-of-living adjustments) will add up towards the premiums if you get them
Do You Really Need Disability Insurance?
Now, for the most important question: Do you really need disability insurance?
To answer that question, let’s consider the following idea:
Most people buy life insurance to protect their loved ones, home insurance to protect their homes, auto insurance to protect their cars. Why not buy something that will protect your income?
When you think about it, disability insurance is exactly just that: Income protection.
Should something unfortunate happen, rendering you unable to work for a certain period of time, disability insurance will help you pay a good portion of your living expenses.
Most employer disability insurance benefits are short-term (though some offer long-term coverage too, so better check it out). These short-term policies will only pay you benefits for a few months to less than a year.
However, should you get sick or injure yourself with something that will require you to miss work for a long period of time (long-term disability typically lasts 6 months or more), then long-term disability insurance can help you “recover” a portion of your income while you rest and recover.
Keep your family supported
This is especially crucial if you are the family’s breadwinner. With no other source of income, families of people without disability insurance may be forced to take up extra work. And, drop some of the stuff that they’ve been used to since there’s now significantly less income.
To some, the thought of becoming disabled and requiring expensive care is frightening. Not only because of the expenses, but also because of the likelihood that family members will need to drop whatever they’re doing to take care of you.
Not just freak accidents and illnesses
If you’re thinking, “I don’t really need disability insurance as I work in a pretty safe environment”, well, that’s because you think this type of policy only applies to freak accidents and injuries. In reality, 90% of long-term disabilities are illnesses, such as cancer.
Also, worker’s compensation covers only about 5% of potential disabilities and illnesses, so if you (knock on wood) get yourself into something (or get sick with something) not covered by it, then hopefully you have some emergency funds to rely on if your employer doesn’t offer disability insurance.
Remember, disability insurance is not a waste of money if you never collect on the benefits. When you buy a policy, you’re buying protection for your loved ones, your lifestyle, and your way of living. It’s that value and peace of mind you get from paying the premiums.
Other Things to Keep in Mind with Disability Insurance
Now that you have a basic understanding of how disability insurance works, here are a couple of things to keep in mind before buying a policy.
Check With Your Employer
Check with your employer first if you’re already covered with some form of disability insurance. If you already have short-term coverage, determine if a long-term disability policy is fit for you and viable.
Get a Good Payout
Try to get a policy that will pay you at least 60% of your pre-tax income.
Own Occupation vs. Any Occupation
After deciding on a policy, try to get one that is an “Own Occupation” coverage that’s non-cancellable (means your premiums are locked permanently) and comes with residual benefits (pays benefits if you can work for some time but not all the time)
If you’re going for long-term disability insurance, try to get something that will cover you for at least 5 years or up to age 67 (which is the point when your retirement benefits take over).
A policy that has an elimination period of 90 -180 days is ideal. It refers to the time between the occurrence of the disability and the start of the benefits.
Do your due diligence when shopping for disability insurance. Read the fine print and ask questions if some things are not clear. It goes without saying that you should only buy insurance from reputable companies with an excellent reputation and strong financial status.
Get Some Help
Getting help from a professional can make the entire process a whole lot easier. Not only that, the right advisor can help you pick the right insurance provider that perfectly fits your needs.
Bad things happen, whether it’s from a bad decision or just plain bad luck. Sometimes, it’s not even your fault. Disability insurance is something that is not usually considered by many, mainly because they feel they won’t need it.
In reality, a good number of the population needs it, especially those who stand as breadwinners of their family. And even if you’re single, you still should consider it. Accidents and illnesses can happen to anyone. When they do, having some portion of income to support you is absolutely crucial.
I hope this article helped you understand the basics and importance of disability insurance. And if you’re interested in learning more about other types of insurance and how they work, please feel free to read other great content here.