Disability can be more disastrous financially than death. If you are disabled, you lose your earning power, but you still have living expenses and often huge expenses for medical care. Disability insurance can help your family maintain its standard of living while you recover.
If you suffered a disability that affected your ability to earn a living, how would you make ends meet?
- Savings? Yes, if you have planned ahead. However, only about a quarter of Americans (24 percent) have enough savings to cover six months’ worth of lost wages. Another 24 percent have no emergency savings at all.
- Social Security? Unlikely. Qualifying for Social Security disability benefits is more difficult than qualifying for benefits under a private insurance plan. Social Security has a very stringent definition of disability. And benefits are low—in 2011, the monthly benefit averaged $1,237 for a disabled man and only $972 for a disabled woman, due to their generally lower pre-disability earnings. Could you maintain your standard of living on that?
- Employer-provided disability insurance? Possibly. Employer-sponsored plans can provide basic disability coverage on a group basis—which can be important for people whose health would disqualify them from individual coverage. However, only 39 percent of private industry workers had access to employer-sponsored short-term disability insurance, while only 33 percent had access to employer-sponsored long-term disability insurance.
- Individual disability insurance? Individual disability insurance provides portable coverage that you can take with you, even if you leave your employer. And if you buy a noncancellable policy, you can have coverage for life, even if your health status changes, as long as you continue to pay premiums.
Those who have employer-provided disability income insurance can use an individual policy to supplement benefits under the employer’s group plan. All disability insurance policies replace only a portion of your pre-disability earnings; some group plans replace as little as 50 percent. Individual plans might replace as much as 80 percent of pre-disability earnings.
If your employer pays the premiums on a group plan, income taxes will further reduce your monthly income. When you buy an individual policy, you pay premiums with taxable dollars, but receive any benefits tax-free.
There are two types of disability policies: Short-term disability policies pay benefits for a maximum of two years, while long-term disability policies pay benefits until either age 65 or life. (Most policies that pay lifetime benefits will reduce your benefits once you reach age 65.)
When purchasing disability insurance, ask:
- How does the policy define disability? Some policies consider you disabled if you are unable to perform the duties of any job. Better plans pay benefits if you are unable to do the usual duties of your own occupation.
- When do benefits begin? Most plans have a waiting period after an illness before payments begin. A short-term disability policy might begin to pay benefits immediately for a disability resulting from a non-work accident and within a week for one resulting from illness. However, more commonly you’ll find policies with waiting periods of two weeks to one month.
- How long do benefits last? After the waiting period, payments are usually available until you reach age 65, though shorter or longer terms are also available.
- What will the policy pay? In addition to looking at the percentage of income a policy will replace, make sure you understand any offsets. Will your insurer reduce benefits by Social Security disability and workers’ compensation payments? Will your benefits increase with inflation? Will the policy sponsor continue making contributions to your pension plan so you have retirement benefits when the disability coverage ends?