Insurance. There are probably no other financial terms more likely to induce feelings of sleepiness. Or dread. After all, who likes to spend money on something you hope you'll never have to use? And don't you have enough types of insurance already?
Well, without wanting to sound like an insurance salesperson, how would you pay your bills if an accident or illness left you unable to work? That's the risk disability insurance is designed to cover. It would pay a portion of your salary in that situation.
The good news is you may already have adequate protection. And even if you don't, the cost of coverage may not be as high as you feared. Here's what you need to know about disability insurance.
1. You Might Need It
When you're young and healthy, it's difficult to imagine life might ever be different.
However, the insurance industry is quick to point out that your chances of becoming disabled are higher than your chances of dying prematurely. And the Social Security Administration has a scary-sounding statistic to back that up: Some 25% of 20-year-olds will become disabled before reaching retirement age.
However, not all disabilities are the same. Some are severe and permanent. About 10% of all Americans are now severely disabled, according to the U.S. Census Bureau. Many other disabilities are neither severe nor long-lasting. To put the situation in context, the Council of Disability Awareness says the average length of a long-term disability claim is three years.
So, when considering your need for disability insurance, it's important not to be scared into overpaying for protection.
2. You Might Already Have Some
Even without buying a disability insurance policy, you might already be at least partly covered.
This program is administered on a state-by-state basis, and some states do not require companies with fewer than four employees to maintain the coverage. However, if you work for a company that does carry workers' "comp" and you're injured on the job or develop a work-related disabling illness, this insurance should cover about two-thirds of your pre-disability income.
Still, the National Safety Council points out that only 27% of long-term disabilities are work-related. Most don't even come from accidents; they come from cancer, heart disease, and other illnesses.
If you've been contributing to Social Security long enough, you may qualify for disability benefits. To find out, go to ssa.gov and click on "sign in/up." However, even if you're eligible for Social Security disability benefits, that doesn't mean you'll qualify. Your disability has to be severe enough to keep you from working for at least a year (or be expected to), and it has to prevent you from doing the work you used to do or keep you from "adjusting to other work." In other words, the program is designed to protect only the most severely disabled.
If you experience a short-term disability, you may be able to cover your expenses with personal savings. For example, an emergency fund savings account containing six months' worth of essential living expenses could be viewed as a short-term disability policy.
You may be able to tap retirement funds, as well. For example, if you have a workplace plan, such as a 401K, you may be able to take out a low-interest loan. Or, if you have a Roth IRA, you can withdraw your contributions at any time for any reason without penalty.
3. You Might Need More
After reviewing all of the above, if you decide to buy additional coverage, check whether it's offered through your employer. That will typically be the least expensive option.
4. You Can Control the Cost
Key variables that will influence the price of a policy include:
- The waiting period. This is the amount of time between the onset of a disability and when the policy will begin paying. The longer the waiting period, the less the policy will cost.
- The benefits period. This is how long the policy will pay benefits. You could opt for a policy that pays through age 67, but remember, the average long-term claim is three years, and choosing a shorter benefits period will lower the cost of the policy.
- The benefit amount. You may qualify to cover 60% of your salary, but choosing a lesser amount will lower your cost.
- The definition of "disability." Ideally, you'll want a policy that protects you in case you are no longer able to perform the duties of your current occupation (an "own occupation" policy). You could buy a less expensive policy, though, if you're willing to accept one that pays only if you are not able to do other types of work.
- Add-ons. You'll be offered numerous policy "riders." Among those that may make the most sense is inflation protection, which would provide a cost-of-living increase in the benefit amount each year.
Your ability to earn income is one of your most valuable assets. So, if you're not covered by a workplace disability insurance policy, take a few minutes to think about how you would pay your bills if you were suddenly unable to work. And keep in mind that you don't need to buy the most deluxe policy available. Protecting some of your income would be better than protecting none of it.