Is Disability Insurance really necessary?
The possibility of becoming disabled is very real for working Americans, and so are the financial consequences and costs associated with employee absence. Unless it is offered through their employer, most adults have little, if any, disability insurance coverage.
Why you need disability insurance
The chances of a disability are higher than people think. The Social Security Administration reports that one in four of today’s 20 year-olds will become disabled before reaching age 67. In addition, Unum reported that 41 percent of long-term disability recipients were younger than 50 and a third were younger than 40.
Further, only 9% of long-term disability cases are caused by accidents. The truth is illnesses are the leading causes of disability. Approximately 90% of disabilities are due to chronic conditions, such as back or joint pain, or cancer, diabetes and heart disease.
Types of disability coverage
There are two main types of disability insurance - short-term and long-term coverage. If disabled, both policies will replace a portion of your monthly salary. In addition, some long-term policies come with extra benefits like job retraining so that you can re-enter the workforce if you are no longer able to perform your old job.
Policies will often pay out benefits depending on how they define "disabled," and coverages engage in various circumstances:
- Some will pay only if you cannot work at all.
- Some will only pay out benefits if you can't work in any job that you are qualified for.
- Some will pay if you can't perform a job in your current occupation.
- Some will even cover partial disabilities and will pay a portion of benefits if you are able to work part-time or in light duty with lower pay.
- Replace 60% to 70% of base salary
- Length of payments varies for a few months up to one year.
- Usually have a waiting period of about two weeks between the time of disability and when benefits are first received.
- Replace 40% to 60% of base salary.
- Will pay benefits until the disability ends or a set number of years after the policyholder retires.
- Usually have a waiting period of 90 days from the time of disability until the first benefit is paid.
Buying your own disability policy
Many employers will offer voluntary disability insurance, but some policies may not offer sufficient coverage due to a salary cap. In that case, a personal disability policy may be needed. It’s important to note that the maximum amount of salary that can be replaced through disability policies is 75% from all of policies combined.
The benefits of a personal disability policy are:
- You can customize coverage with additional coverages like job retraining and cost-of-living adjustments each year.
- The policy stays with you if you change jobs, and for as long as you keep up the premiums.
- Benefits paid are not taxed, unlike a policy that your employer may pay for.
Premiums for a long-term disability policy usually range from 1% to 3% of your annual income.
Factors that can affect the premium include:
- Your age.
- Your health.
- Your gender (women pay more than men).
- Your job (high-risk jobs mean higher premiums).
- Policy definition of "disability." The narrower the definition, the lower the premium (see above).
- Length of waiting period for when the insurer starts paying benefits.
- Your income.
- Length of time that benefits are paid.
- Additional features like job retraining, cost-of-living adjustments.
Social Security and Workers Compensation reminders
Social Security benefits cannot be collected until the end of the fifth full month of disability – and only if you’re expected to be out of work for 12 or more months. It’s also difficult to get approved for Social Security disability benefits. In 2015, only 32 percent of workers who applied for Social Security benefits were approved.
Workers Compensation pays a benefit only if an accident or illness occurs on the job. Fewer than 5 percent of disability accidents and illness are work related.
Most Americans are financially unprepared for a disability, which lasts 34.6 months on average. And most underestimate their risk for a disability. Disability benefits along with relevant and meaningful education will help employees better prepare for the unexpected.