Disability Insurance

Why You Need Disability Insurance

Disability insurance now there’s a riveting topic. No, it’s not exciting or flashy, but it is necessary. Don’t you 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 purchasing life insurance. What about damage to your car or home? You’ve got that covered. Why not insure your income? That’s precisely 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, 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 cannot work for a minimum of 12 months. If your disability only lasts six months, you don’t qualify.

Your benefit is based on your lifetime earnings and 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 for group disability insurance: Short-Term and Long-Term.

Short-Term: Coverage begins on day one of a disability and can last six 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.

There is good news if you want to shop for an individual plan. You have many more options, and you can select a plan that will meet your needs compared to a group policy. Unfortunately, you’re going to pay for those options.

Disability insurance is coverage for when you cannot perform a pre-determined definition of an occupation. Those pre-determined definitions will define what work/occupation the policy covers. They are:

Own Occupation:  When you’re unable to perform your own occupation.

Modified Any Occupation: If you cannot engage in any occupation you are qualified for through training, education, or experience.

Any Occupation: The “Social Security Definition” means you cannot engage in any occupation.

This is important. If you can 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, do a few jumping jacks, and then read more. The details are essential to ensure 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 increases the benefits to keep pace with inflation.
  • Non-Cancelable and Guaranteed Renewable Policy. Ensure 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 benefit reduction 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, except for the death part.  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 two years, but this does not include the owner’s salary.

We always talk about preparing for the unexpected; a disability is at the 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.