You’ve recently learned some troubling statistics, namely:
- One in four of today’s 20-year-olds will become disabled before reaching age 67.
- The average individual disability claim lasts nearly 32 months.
- Nearly one-third of respondents to a 2015 survey indicated they would not be able to cover three months of living expenses (even by borrowing) if a financial disruption occurred.
And now you’ve decided to protect yourself and your family. You want the peace of mind that comes with income replacement. What disability insurance sources do you have?
Sources for Disability Insurance
Most people who have disability insurance get it through their employer. But as we shall see, there are several other sources of disability insurance.
A word of warning, it may be somewhat counterproductive to have certain combinations of disability insurance. One source’s benefits may reduce the chance you have to receive benefits from another.
As a general rule, if you add up all your disability payments, they will not exceed 80 percent of your average lifetime earnings (NOT your current earnings) before the disability.
Also, disability benefits from an individually purchased policy are usually not taxed. Benefits from an employer policy are often purchased with pre-tax dollars, which means the benefits will be considered taxable income.
Disability Insurance Options
Workers’ Compensation Insurance
If someone suffers a disabling illness or injury related to work, workers’ compensation insurance may provide a portion of salary. Normally, workers’ comp pays around two-thirds of your pre-disability income. Important note: 73 percent of long-term disabilities are non-work related, which disqualifies income replacement via workers’ compensation.
State Disability Insurance Programs
New Jersey, Hawaii, New York, California, Rhode Island, and Puerto Rico all provide short-term disability coverage. For people in these states, this is a valuable source of income replacement which can last up to six months.
The Social Security Administration (SSA) administers disability benefits. SSA disability eligibility is determined by the inability to perform ANY gainful employment (as opposed to the inability to perform the specific job at the time of the disability). Social Security disability is federally taxed as income.
Employer Sponsored Disability Insurance
Employers, especially larger ones, may offer short-term and/or long-term group disability insurance. One of the greatest features of employer-sponsored coverage is all employees automatically qualify. However, if you have a pre-existing condition when you start a new job, there may be a waiting period of 12 months. This type of coverage may come with a benefit of increasing your coverage, but be advised that additional coverage can come with the price of answering some questions about your health.
Individual Disability Insurance
An individual disability insurance policy is one you personally purchase. It offers the most flexibility of all the disability insurance we have listed. An individual policy travels with you, regardless of career or job change. Most individual plans replace between 40 percent and 65 percent of gross salary. These benefits are income tax free.
Take a Long Hard Look at These Opportunities
You have health insurance, car insurance, renter’s insurance, and perhaps other types of insurance. So you may be well-covered for the hospital tending to your disability, but where will you get the money to live on once you leave the hospital? Disability insurance protects your income. Without it, you could easily burn through your savings and put those who depend on you in jeopardy. Before this happens, investigate these options and gain a sense of responsibility and peace of mind.