Disability insurance, now there’s a riveting topic. No, it’s not exciting or flashy, but it is necessary. Don’t think it’ll ever happen to you? That’s the reason why you need disability insurance. It’s the unexpected events that can wipe you out.
Insurance on your income and skills
You worry about dying early and purchase life insurance. What about damage to your car or home? You got that covered. Why not insure your income? That’s exactly what disability insurance is. Your potential earnings are the most valuable asset you have. Do yourself and your family a favor and protect it.
You are 3 times more likely to become disabled than die during your working years
Gee, doesn’t that make you feel better?! Seriously, though, what happens if an illness or injury prevents you from working? Who will help provide for your family? Life insurance won’t help because you’re still breathing. That’s when disability insurance, the often-forgotten insurance stepchild, can help.
Social Security Disability may help if you qualify under their eligibility rules. That means you cannot work in your own or any other occupation AND are unable to work for a minimum of 12 months. If your disability only lasts 6 months, you don’t qualify.
Your benefit is based on your lifetime earnings and unfortunately may not come close to replacing your income.
How to get coverage
By far, most disability coverage is obtained through employers. These policies are less expensive but not as good as individual plans. You have two options when it comes to group disability insurance, Short-Term, and Long-Term.
Short-Term: Coverage begins on day one of a disability and can last 6 months to maybe a year.
Long-Term: This coverage starts after the short-term policy expires and will last as long as the contract indicates.
If you want to shop for an individual plan, there is good news. You have many more options, and you can select a plan that will meet all of your needs compared to a group policy. Unfortunately, you’re going to pay for those options.
Disability insurance is coverage for when you are unable to perform a pre-determined definition of an occupation. Those pre-determined definitions will define what work/occupation is covered by the policy. They are:
Own Occupation: When you’re unable to perform your own occupation.
Modified Any Occupation: If you’re unable to engage in any occupation for which you are qualified through training, education or experience.
Any Occupation: The “Social Security Definition” which means that you are unable to engage in any occupation.
This is obviously important. If you’re able to work in “any occupation” that does not mean you’ll earn the same amount in that occupation as you do now. Probably not what you want.
The small print
Hang with me. Now we’re about to get into the details. If you must, read a bit, get up and do a few jumping jacks, and then read some more. The details are important to make sure you have the coverage you need at the premium you can afford.
- Benefit Amount: Disability policies usually cover up to 60% of your gross income, sometimes less. Also, even if it does cover 60%, there may be other monthly or yearly limits on how much is paid out, so you still may end up with less than 60%.
- Benefit Period: Long-term does not mean forever! Policies have a maximum length of benefits. Most expire at age 65, but many group plans may only provide coverage for 2, 5, or 10 years – that’s a big difference.
- Elimination Period: This is the time you have to wait before the policy starts paying out. Typically it’s 90 days. If you want less than 90 days, the premium will be higher.
- Cost of Living Adjustment (COLA): This provides an increase in the benefits to keep pace with inflation.
- Non-Cancelable and Guaranteed Renewable Policy. Make sure the insurer cannot cancel the policy, and that it’s automatically renewed as long as you pay your premium on time.
- Long-term policies may also have a dollar-for-dollar reduction in benefits for Social Security benefits with a “coordination of benefits provision.”
- Some group (and individual) policies have a split occupation definition. One definition for the first 1 or 2 years, maybe your own occupation, and then any occupation after that.
Business owners and disability insurance
Disability insurance is essential for business owners. The impact a disability could have on your business, and the decrease in the value of the business it would cause could be catastrophic.
Buy-Sell Agreements: Although most think of life insurance when it comes to buy-sell agreements, what happens if the partner is disabled? A disability policy works just like life insurance, with the exception of the death part of course. If a partner becomes disabled, the policy can create funding to buy the disabled partner’s portion.
Business Overhead Expense: These policies cover the ongoing operational expenses of a business while the business owner is disabled. Expenses are covered for a specific time, usually under 2 years, but this does not include the owner’s salary.
We always talk about preparing for the unexpected, and a disability is at that top of that list. It will throw your plans out the window and can cause financial chaos. You can protect your future earnings and soften the blow with disability insurance.
If you know anyone who may benefit by protecting their earnings please share via the buttons below.