Most Americans enjoy working, according to FirstThings.org. Most Americans say they would continue working even if they were independently wealthy and didn't need to work. The problem comes in when a worker who is not independently wealthy becomes ill or injured and is unable to work. That is where short-term and long-term disability insurance come into play.
Reasons to Have Disability Insurance
Most Americans have at least some money socked away in savings, typically in a traditional passbook savings account, money market fund or bank certificate of deposit. Less than 40 percent of adults have enough money set aside to cover at least three months' worth of living expenses, according to Bankrate.com. However, 43 percent of adult Americans between the ages of 40 and 65 years will have a job-limiting disability event that lasts more than 90 days, according to the Insurance Information Institute. Disability insurance can help fill in the gaps left by loss of income during that time frame.
Short-Term Disability Insurance
Disability insurance is a contract between the insured party and the insurance company. The insured party agrees to pay a regular premium in exchange for a promise from the insurance company to pay a portion of the insured's regular pay rate in the event of a covered injury or illness that prevents him from working. Short-term disability typically becomes effective within 14 days of the insured becoming disabled, according to the Insurance Information Institute. The policy may pay a significant percentage of the insured's regular pay rate, up to 90 percent, for a period of up to two years.
Long-Term Disability Insurance
Long-term disability insurance is usually purchased in conjunction with short term disability insurance. The long-term portion of the policy typically kicks in after the benefits of the short-term policy expire. Long-term disability insurance policies typically pay at a reduced rate, usually 50 to 70 percent of the insured's regular pay rate, for an extended period of time that may last from several years to the life of the insured.
Many employers provide or offer disability insurance to their employees. The premium may be paid by either the employer or the employee. In some cases the employee has the option of purchasing higher benefit plans through his employer. Individuals may purchase private disability insurance, and certain levels of disability insurance are provided by the Social Security Administration. Disability insurance policies cannot be canceled by the insurer except for nonpayment of premiums and are guaranteed renewable, according to the Insurance Information Institute. Benefits paid for disability insurance claims may be taxable as ordinary income if the premiums were paid by the employer.
- Insurance Information Institute: How Can I Insure Against Loss of Income?
- Insurance Information Institute: What are the Types of Disability Insurance?
- Insurance Information Institute: Will my Employer Provide Disability Coverage?
- Insurance Information Institute: How Can I Save Money?
- First Things: What Makes People Happy?
- Bankrate: Survey: Most Americans Fail the Emergency-Fund Test
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.