Disability Insurance Basics

Disability Insurance Basics
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More than likely, you have insurance coverage to protect your house and your car, as well as life insurance and health insurance. But, what about disability coverage? What happens if you lose your job or your source of income? What disability income insurance do you have in place?

According to the Council for Disability Awareness, more than one in four workers will have a disability that lasts more than ​90 days​ before they become ​67​. These disabilities don't necessarily come from freak accidents. They can be the result of a heart attack, cancer, diabetes or some other illness that would prevent them from working for a period of time.

The solution to covering this risk is disability insurance. Let's look at how disability insurance works, what it covers and how much a disability insurance plan costs.

What Is Disability Insurance?

Disability insurance will pay a portion of your income when something happens and you're unable to work. It's easy to qualify for a policy when you're young and healthy, but premiums go up as you get older. If you begin to have health problems, you may find it more difficult to obtain disability insurance at premiums you can afford.

Disability insurance is different from workers’ compensation. Disability insurance covers loss of income from an injury or illness whereas workers' compensation covers lost time from work as a result of a specific work-related injury.

How Does Disability Insurance Work?

There are two types of disability insurance: short-term and long-term. They both replace part of your income, but they have different qualifications and coverage.

Short-term disability insurance will cover ​60 to 70 percent​ of your income. The coverage usually lasts for a few months to a year and typically begins within two weeks after your doctor has confirmed that you have a disability and you file a disability claim.

Long-term disability insurance will cover ​40 to 60 percent​ of your income. However, long-term insurance will pay you for up to five years or even longer if you continue to be disabled. Unlike short-term disability insurance, approvals for long-term insurance can take anywhere from three to six months before you get your first payment.

Disability insurance is available from private companies and through the Social Security System Administration.

What Does Disabled Mean?

Insurance companies often have a different definition of disability. For some policies, disabled means that you can't work at the job that you are qualified for. Other policies take a broader view and consider disabled as not being able to work at any other job in your own occupation.

There are policies that cover situations where you have a partial disability but are still able to work part-time. In these cases, you would receive a portion of your income to cover a partial workload. For other policies, you must be completely disabled and not capable of working at any job or in any position.

To qualify for Social Security disability payments from Social Security Disability Insurance (SSDI), an applicant must have a disability so severe that they cannot engage in any type of work at all. In addition, Social Security requires that the applicant prove that their disability will last for at least 12 months or until they pass away.

How a company defines disabled and the extent of income coverage will affect the policy’s cost.

How Much Does Disability Insurance Cost?

Premiums for both short-term and long-term disability insurance range from ​1 percent to 3 percent​ of your annual income. For example, if your income is ​$60,000 a year,​ you can expect to pay a monthly premium from ​$50 to $150 per month.

The amount you pay for your premiums will be affected by your age, occupation, income level and whether or not you smoke. Risk is also considered by an insurer, with premiums for a firefighter, for example, higher than the premiums for an office job like a telemarketer.

If the premiums are too high, you could reduce the cost by:

  • Increasing the amount of time in the waiting period before benefits begin
  • Reducing the payout benefit period
  • Reducing the amount of each monthly benefit payment

How to Obtain Disability Insurance

The easiest way to get disability insurance is to sign up through your workplace if your employer offers it as a benefit under a group plan or group policy. Employers who offer disability insurance will probably pay all the cost of the premiums or at least some of it.

Even if your employer does not pay for the premiums, you may still be able to buy disability insurance through the company. This would let you buy insurance through the company's broker at a group rate. Another option is to buy disability insurance at a group rate through a professional association.

If none of these options are available to you, you can always buy an individual disability insurance policy directly from an insurance company or a broker. However, most individual policies are long-term disability policies that are not intended for the short term.

How to Buy Disability Insurance

Even if you’re able to obtain disability insurance through your employer, you may still want to purchase individual coverage. Most policies through an employer will only pay a portion of your salary and will have a cap. In this case, it's a good idea to get supplementary coverage, especially if your income relies on commissions or bonuses. Generally, you won’t be able to cover more than ​75 percent​ of your income, even with a combination of policies.

Ask yourself these questions to determine the kind of disability insurance you need:

How much income do you need to cover your expenses?​ How much income would you need to pay your basic and necessary expenses to maintain your lifestyle? How close you are to retirement or drawing on your social security benefits may enter into this equation.

How long could you wait before receiving an income check?​ The length of time between applying for disability benefits and receiving a check is known as the “elimination period.” The normal elimination period is ​90 days,​ but you can choose a longer or shorter time. Shorter elimination periods will have higher premiums.

How many months or years will you need the benefits?​ This is a tough question to answer. Will you want to cover six months or five years? Some policies have limitations on the number of years, depending on the occupation. Longer coverages will cost more.

What is your definition of being disabled?​ Highly skilled people will want a policy that pays if they’re unable to work in their specialty. For example, a surgeon may lose the ability to operate but still be able to teach or see patients as a general practitioner. But these positions would provide considerably less income protection than the compensation for a surgeon. So, a surgeon would want a disability policy that pays a portion of their pre-disability salary as a surgeon, not as a teacher.

Disability insurance should be part of your overall financial planning. A loss of income could have devastating effects on your financial health and stability.