What is Disability Insurance?
If you depend on your income or a family member’s income to pay for daily living expenses, then you need to answer, “what is disability insurance?”
Disability insurance protects your family from a loss of significant income when you get sick or injured and cannot work.
There are two types of disability insurance.
- Long-Term Disability – LTD can cover you from 2 years up to life (depending on the plan). It provides monthly payments to help you in covering life expenses. LTD benefits start when you have a qualified sickness or injury and are unable to work.
- Short-Term Disability – STD can cover just a few days up to six months. It is often a part of an employer’s group insurance plan options. It can be used for short-term sicknesses, injuries or even as a pregnancy/family leave option.
Uses for Disability Insurance
When you have people to provide for and bills to pay, disability insurance is a safety net for your family. In addition to paying for daily living expenses, disability insurance can help you meet your saving goals. Let’s look at both uses in a little more detail.
Use #1: Meeting Daily Living Expenses
If you are suddenly unable to work, due to illness or injury, the last thing you need is extra stress. Stress can slow down healing and keep you out of work longer. Disability insurance will give you a cash flow while you can’t work. You cans use this cash to pay for groceries, rent/mortgage payments, utilities, and other living expenses.
In your working years, paychecks are important. Many people have life insurance to provide cash if they die, which is also important. However, less people have disability insurance, even though injury or sickness is much more common than death.
Use #2: Keeping on Track with Retirement Savings
Next, disability insurance is helpful to anyone who depends on a paycheck, no matter what your age is. However, it is especially important in the years when you are significantly saving up for retirement.
The younger you are, the more time your retirement funds have to grow. As a result, the years in your 20’s, 30’s and 40’s are critical for stashing cash in your accounts. If you get injured and can’t work, you need to consider having enough disability insurance to cover not just your living expenses, but your saving goals too.
How to Get Disability Insurance
There are a few options for receiving disability benefits in the event of injury/sickness.
The US Government Disability Program
The US Government has disability insurance program through the Social Security Department (SSDI).
Social Security has a disability program that pays benefits to people who cannot work because of a medical condition. However, you must prove that the medical condition you have will last longer than one year or result in death. In addition, there is a five month waiting period to receive benefits after disability consideration.
SS disability benefit payments are based on the average earning you made in your lifetime before you were disabled. The average payment in 2019 was $1,234 a month.
You can visit the governments disability website here to learn more and apply if needed.
TDI Short-Term Disability in Five Lucky States
In addition, Puerto Rico and US five states (California, Hawaii, New Jersey, New York, and Rhode Island) have Temporary Disability Insurance (TDI) programs that offer limited disability benefits to workers that are sick or injured in events unrelated to work activities. In more good news, four of these states (CA, RI, NY and NJ) also have required family leave benefits. You can read more about these programs on this web-page.
Disability Insurance from an Employer
If you have an employer that offers disability insurance, start there. Often times employers have a plan to cover around 60% of your salary. You may or may not have to choose this benefit. In addition, you may or may not have to contribute premium payments to the employer’s group plan.
The group insurance premium cost is often very affordable, so we recommend always participating in your employer’s plan. This is true even if they do not pay for premiums.
Note that when your employer pays your disability benefit premiums, you will need to pay taxes on these benefits. In some rare cases, your employer might pay these taxes for you. However, usually they are taken out of your benefits. As a consequence, you will need to account for taxes in your cash flow budget.
Some at Work Action Steps
- First, check with your employer to see what your disability benefits include (short-term and long-term). Then, confirm you are signed-up.
- In addition, when you are discovering how much your employer’s plan pays, see if the payments take into account Social Security Disability Payments or if those are considered separate.
- Then, calculate what your benefit payments would be. (Remember to take out taxes if your employer is paying your premiums.) Is that enough monthly cash to cover your expenses?
- Finally, ask what the time limits are on payments and if there is a waiting period before the payments begin.
What About Worker’s Compensation Insurance?
Additionally , if you are injured on the job, your employer’s worker’s compensation insurance may be available. Workers Comp is insurance specifically designed to protect workers from the hazards that are present at work. Accordingly, it only treats injuries and sicknesses that arise as a direct result of working activities.
To clarify, worker’s comp will not cover you for injuries or sicknesses that happen outside of work activities. That is what disability insurance is for.
Disability Insurance from a Private Insurance Company
Unfortunately, the 60% of your paycheck that employer plans cover is often not enough money to cover your living expenses. This is especially true in one-earner households.
In these instances, you will want to find second disability insurance policy from an insurance company. Moreover, finding a stand-alone disability policy is even more important when your employer offers no disability benefits.
We recommend purchasing a stand-alone disability insurance policy for anyone of working age that has not saved up enough yet to retire comfortably if forced to.
According to the Social Security Administration, there is a one-in-four chance a 20-year-old worker will end up needing it before retirement age.
So, Where to Start?
Depending on your comfort level:
- You can meet with an insurance agent by phone or in person.
- Or you can buy a policy online.
How to Tailor Your DI Policy
You can tailor your DI policy to fit your needs. While researching policies, look at what you know you already have and where your short-falls are.
Here is a familiar situation:
You have 60% coverage from your employer (which may include in it the SS benefit payments). Thus, you will need to provide for the other 40% or less of your monthly paycheck. Just think about what is necessary to cover all your expenses and retirement saving plans.
Options and Add-Ons to DI Plans
Private DI plans can give you options and features to add on.
- You can choose total disability benefits or proportionate disability benefits.
- Next, you can adjust the amount of monthly payout, as well as the premium amount, to reflect your needs.
- In addition, benefit periods can last different amounts of time. For example, you can pay for a 2 year benefit, which would be a smaller premium than a 10 year or to age 67 premium.
- Also, you can choose the amount of time that lapses before the benefits kick in after being considered disabled. This is also known as the Elimination Period. The more days out the benefits start (60, 90, 180, etc.), the lower your premium costs can be.
- Competitive polices include features like guaranteed renew-ability. (This means insurance companies cannot cancel them as long as you pay your premiums). Also, they can include waiver of premium options, accelerated benefits for terminal illnesses, or survivor benefits.
- There are also riders you can add on with some companies. These riders can include inflation cost-of-living benefit adjustments, hospital/medical/critical illness riders, and return of premium riders.
In summary, if you are of working age and still saving for retirement, you need to have a disability plan. Who will provide for you and your family if you are unable to work? When you can answer this question, you are one step closer to having a complete financial plan.