Educating yourself about the pros and cons of insurance can be quite challenging. Even after you do your homework, decide you want to purchase disability insurance, you must still choose a provider and a policy, and maybe go through underwriting. It is no wonder that many people do not follow through and stay uninsured, under-insured, or mis-insured. The following questions are some of the most frequently asked about disability insurance. Hopefully, these concise answers will help prepare you for road to disability insurance. Remember, nothing that comes too easy is ever worth having.
Disability Insurance FAQs
Do I really need disability insurance?
Disability insurance covers a portion of your income should poor health or injury threaten your ability to earn an income.
Studies show that a 20-year-old worker has a one-in-four chance of becoming disabled before reaching full retirement age. This statistic runs counter to the belief that many have that disability is extremely rare.
If you or your loved ones depend on your ability to provide an income to pay for life expenses, then you need disability insurance. Those who are working for fun, more power to you.
What is short-term disability insurance?
Short-term disability insurance covers individuals who cannot work for a short period of time due to illness or injury. Even though there are some short-term policies which provide coverage for up to two years, most coverage only lasts between three-to-six months.
What is long-term disability insurance?
Long-term disability insurance provides coverage for a disability lasting six months or longer. Some long-term policies provide coverage up to retirement age.
Long-term disability insurance typically costs more than short-term disability insurance, which is expected for a policy that protects you for a longer period. Another disadvantage is long-term policies usually include a three-to-six month (or longer) waiting period before the policy holder begins receiving benefits. For this waiting period, people can tap into an emergency savings fund, however, statistics show that very few people have a generous emergency fund. Also, those who have a short-term policy and a long-term policy can use the funds from short-term policy to get them through this time of waiting.
Does Disability Insurance Cover all Disabilities?
Disabilities that are not covered depend largely on the specific policy. In general, many policies do not include the following disabilities:
- A disability resulting from participation in a riot.
- Injuries which are intentional and a result of self-infliction.
- War or any act of war.
- Any period of disability during incarceration.
- A disability resulting from a crime in which the individual has been convicted.
- Pre-existing conditions.
- For short-term disability: occupational sickness or injury.
Can I work part-time and still collect benefits?
Your insurance contract will specify if you can receive benefits while working part-time. Many policies allow you to work, but take the amount you earn and subtract it from your benefit. If your policy has a lifetime benefit cap, working part-time may extend the life of your benefits.
How much disability insurance should I get?
Insurance companies typically do not sell disability insurance policies which replace all of your income. But, they do sell policies which can replace up to 70 percent of your income. If your employer does not offer a disability plan with 70 percent coverage, you may want to look for supplemental insurance coverage to offset the difference.
One major benefit of owning your policy is you pay the premiums. When you pay premiums yourself, you are paying with after-tax dollars. Therefore, any benefits will likely be tax-free. Tax-free benefits paying 70 percent of your income comes close to being 100 percent of your take-home pay. If your employer pays the premiums and the cost is not included in your taxable income, then benefits will likely be subject to taxation.
A good rule of thumb is 70 percent coverage, but, as with all insurance needs, it depends on your circumstances and what you can afford. Regardless, seek out a qualified advisor if you need help crunching the numbers.
Disability Insurance Is a Good Idea
Just think how devastating the loss of income would be for you and your dependents. Then think how much worse it would be to lose the ability to earn an income.
This is a circumstance you can avoid with proper planning and an action plan.