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Quick question. “What’s your most valuable asset?”
If your reply is something like, “My car”, “my art collection”, “my house” or “my retirement account", then you're just naming your life achievements.
Truth is, you can't own any of these things without your paycheck, right? Exactly.
If you know anyone who became so ill that they couldn't work for months or years on end, then you would agree that putting yourself in their shoes seems scary.
Without a stream of income, life for you and your family would appear to be frustrating and stressful.
However, there’s a way out. It’s called disability insurance and I’m going to tell you all there is to know about it in this post.
Here’s what you need to know…
What is Disability Insurance?
It works just like a typical life insurance policy -- but instead of paying out when you die, it’s paid out if you become disabled.
You can sum it up as insurance for your paycheck.
So, if you ever become disabled and can’t work anymore, your disability insurance company will pay out benefits that’s equal to your take-home salary to you.
Disability insurance doesn’t cover unexpected accidents alone.
Physical injuries, cancer or even heart attacks are considered as disability.
Do I need disability insurance?
According to the American Payroll Association Survey, about 68% of Americans live paycheck to paycheck and so, are frustrated if their paychecks get delayed for just a week.
It's natural for you to think that you're too healthy to ever be disabled.
You’re settling into the “it can never happen to me” state of mind already and among the millions of Americans who are unprotected from the threat of losing their paycheck.
According to the U.S. Census Bureau, over 40 million Americans fall into the category of being disabled.
That’s about 12.7% of the country’s population.
Like that isn’t scary enough, the Social Security Administration states that one out of every four 20-year-olds fall into the disabled category before they die.
The need for disability insurance might not be that kind of conversation that you’d like to have, just like life insurance.
But it serves as a gap filler and safety net for you just in case of a disability or strange illness.
Think about it…won't you feel much better to know that money would still come in while you're recovering and unable to work?
I thought so too.
Types of Disability Insurance
There are two major types of disability insurance, short term and long term.
Their key difference is how long they last, but before we get deeper into what each stands for, here’s a quick comparison chart between the two:
Short Term vs. Long-Term Comparison Chart
How much it covers
60 – 70% of your base salary.
40% - 60% of your base salary.
How long it lasts
Typically lasts for 3 – 12 months, depending on the policy.
Lasts till your disability ends. If the disability continues, it ends after a fixed number of years or when you reach the age of retirement.
A short waiting period like two weeks, after you’re disabled before the benefits are paid.
The waiting period is usually up to 90 days after you’re disabled before the benefits are paid.
With short-term disability insurance, you’ll be able to replace some part of your paycheck [up to 80% of your income before tax] if you can’t work for a short while - because of an injury or illness – up to one year.
Short-term disability policies are provided by your employer.
The waiting period for the benefits isn’t more than a few weeks. Unless there's extenuating circumstances.
You can use the short-term policies to cover your living expenses while you wait for your long-term policy to take effect.
However, since the average disability time is around three years, short-term disability insurance isn’t an alternative to long-term disability coverage.
This is because it costs almost or the same as long-term disability insurance [1% to 3% of gross income], which isn’t a cost-effective choice if you ask me.
With long-term disability insurance, you would receive benefits each month if you become too sick or disabled to work.
This benefit period can last up to 2, 5, 10 years or even till you reach the age of retirement.
Your monthly benefit is around 60% of your gross income, and the insurance cost is around 1% - 3% of your annual salary.
I believe long-term disability insurance is cost-effective and a full disability insurance that you can buy whether you’re working for someone else or own your business.
Keep in Mind: If you’re like the millions of Americans that believe Social Security Disability Insurance (SSDI) will be your best alternative for disability funds, then it’s time to think again. In case you didn’t know, qualifying for and receiving payments can take up to two years and most times, initial applications get declined.
What Disability Insurance Covers [And What It Doesn't]
Disability insurance covers everything from total disability to rehabilitation, plus a brief period after your recovery.
Some policies offer partial disability coverage and coverage for severe disabilities that your disability insurance company has concluded that you won’t ever be able to recover from.
A variety of illnesses or accidental injuries are covered by disability insurance in some cases, childbirth can be covered.
Besides these, situations that don’t involve your health aren’t covered by your disability insurance.
Some of these situations are:
Common Riders to Consider Adding
Disability insurance riders are the optional ‘add-ons’ that you can add to your base policy.
With these riders, you’ll be able to customize your base policy to address or meet your specific paycheck protection needs.
However, there’s no one-size-fits-all with these riders.
Therefore, you must know what options are open to you, the ones you need most, and the irrelevant ones.
Before we move to the common riders that are worth considering, I would like to recommend two features that you should include in your policy:
Non-cancelable: : With this feature, your insurer can’t alter any part of the policy including the amount you pay as premium or even cancel the policy for any reason.
You’ll be able to renew the policy every year without having an increased premium amount or reduced benefits.
Guaranteed renewable: As long as you keep paying the premiums, this feature gives you the right to renew your policy and guarantees that the insurance company won’t cancel your policy.
But your insurer still reserves the right to increase your premiums if it does so for the other policyholders in the same class rating as you. If you’ve got life insurance, this should sound familiar.
With that said, here are the most common riders you can consider adding to your policy:
With this rider, you’ll be able to increase your coverage in the future without having to go through the whole underwriting again.
If you expect your income to increase later on then this will help to lock in your insurability.
What does this mean?
It means no matter what medically happens to you, you’ll be able to buy more coverage if your income increases.
If you’re more advanced in your career and have no plans of increasing your benefits, you can skip this rider.
With this rider, it will increase your monthly benefit for the first 4 – 5 years of owning the policy without extra underwriting required to justify your normal pay increase.
This increase is optional and can cause rejection, as choosing to increase your benefit will also increase your premiums.
This rider helps to waive the premiums on your policy while you’re on a claim until you’re able to go back to work and resume your payments.
This rider provides benefits if you’re unable to work at your job full-time due to a disability.
You’ll be able to collect part of your paycheck and receive a partial disability payout if you’re still partially disabled.
They will return a fixed percentage of your paid premiums when you cancel your policy.
This means you’re entitled to receive some amount back if you never use the policy benefit.
However, this rider is expensive.
This serves the purpose of increasing your benefit amount to make up for the impact of inflation over time.
Your payouts would increase each year that you’re disabled and on a claim.
It’s also an expensive rider and you’re probably better off balancing your income with the automatic increase and future purchase riders.
But if you’re still young and on a claim for a long while, then this rider is reasonable.
If you’ve got a catastrophic disability – when you can’t perform at least two activities of daily living – this rider will ensure that you’re paid an additional benefit amount.
Unless you’ve got a low tolerance for risks, you're probably not going to need this rider as it's quite expensive.
How Much Does Disability Insurance Cost?
The average cost of disability insurance is about 1% to 3% of your annual gross income.
Also, when it comes to determining your insurance cost [same as premium], your insurer will pay close attention to these factors:
If you’ve got a dangerous or high-risk career with high probabilities of you becoming injured then you should expect to pay high premiums.
Age & Gender
As a result of personal and professional choices that insurance companies associate with risk levels, women are cheaper to insure than men. The older you are, the higher premiums you’ll need to pay.
If you’re a smoker, your risk of becoming disabled is higher and so will your insurance costs.
Some policies would require you to wait a while before you claim benefits.
It’s usually a 90-day wait period after you become disabled. The shorter the waiting period, the more expensive the policy will be.
To make this clearer, let’s look at an example.
Let’s say you’re 45, have a low-risk job and your annual gross income is $200,000.
You’re likely to pay $2,000 to $6,000 as premium for disability insurance.
If you’re under 30 and work as an office manager or secretary [stationary career], then your insurance costs will be lesser than 1 percent of your annual gross income.
If you’re over 45 and work as a pilot, construction worker, or any other high-risk career, then your premiums can cost as high as 15 percent of your annual gross income.
Protect your income.
Compare disability insurance companies instantly to get the best quote.
Who Needs Disability Insurance?
The simple answer…EVERYONE.
It doesn’t matter if you’re an employee or a small business owner, as long as you live paycheck to paycheck and you're certain that your savings account won't last for long if you become disabled.
Having disability insurance will act as a safety net for you to feel secure and not stress about daily expenses while you’re recovering.
Disability insurance covers non-work-related illnesses and accidents.
So, if you break your leg while riding a bike, for example, you’d receive coverage for the period you’re unable to work.
But if you sustain an injury while carrying out your job, disability insurance won’t cover your time off of work.
You would get a Workers' Compensation instead.
So, unless you’ve got a high-risk job, they do not base your premiums on the risks you encounter on your job.
There Are 3 Categories:
Catastrophic or Presumptive Disability: A catastrophically disabled person would need hands-on assistance to be able to perform the activities of daily living, like eating, dressing, bathing and moving around. There’s usually no chance of recovery.
Total Disability: In this case, there’s still hope for recovery after getting enough care from a medical professional. It just means the person is unable to work at the moment.
Partial Disability: In this case, the person might not be able to work at his current job anymore but isn’t restricted from having another job.
For example, a surgeon might be unable to carry out complex surgeries but can still lecture medical students. Since professors are paid lesser than surgeons this is why it’s referred to as partial disability.
As with other insurance types, the best time for you to apply for disability insurance is when you don’t even need it.
Why? Well, when you’re healthy, it’s easier for you to pass medical screening and underwriting.
The result? Lower rates.
Also, you should apply for disability insurance before you're 50 or 65. This is because the policy becomes inactive at age 65 as you’re already eligible for retirement and won’t need coverage for work.
No. However, you need to know the difference between the two so you can understand why both coverages are relevant for your financial welfare.
Worker's Compensation only pays if and only if you’re injured on your job or you’ve got a job-related illness.
Disability Insurance, on the other hand, covers every injury and illness that happens away from your job and isn’t work-related.
With this, you can still pay your bills if you’re disabled for any non-job-related reason.
There are a variety of disability programs provided by the government that offers financial help in the event of a disability. Some of them include:
- Social Security: This pays disability benefits. However, it’s time-wasting and difficult to qualify for plus the payments are quite low.
- State Disability Programs: These programs are offered in Hawaii, New York, California, Rhode Island and New Jersey. The coverage is usually short-term like six months.
- Workers’ Compensation: All states specify that employers must have workers compensation coverage for their employees.
Note: Although these programs can help out a lot, they don’t cover the risks of you losing the ability to work due to an injury or illness.
You can start by deciding how much money you’ll need monthly to pay your bills in case you become disabled.
Generally, insurance policies won't cover over two-thirds of your gross earnings -- but if you purchase an individual policy, you won’t need to pay taxes on your disability checks.
This means that your take-home salary would be about the same.
An own-occupation policy pays out when you can’t work at your current job anymore and would need to switch jobs.
They give greater protection but at a higher cost.
An any-occupation policy, on the other hand, costs less as they only cover catastrophic situations whereby you can’t work anywhere anymore.
Getting Started with Disability Insurance
If you’re ready for disability insurance, but don’t know where to start, then you can use these tips to get the coverage you need:
Determine How Much Coverage You Need and the Features You Want. I would advise that you always do your homework before you contact an insurance company about buying a policy.
Find out if your employer provides a disability benefit for workers and the conditions.
To make this easier to understand, most companies provide short-term disability insurance, offering a guaranteed 100% of your income for about 90 days of disability.
However, the benefit drops to 60% of your income after 3 months, until you clock 60.
In this case, you should look for an insurance policy that will replace 40% of your income after a 90-day wait period.
Simply put…you need to always maintain 100% of your gross income regardless of the policy you choose to use.
Get different quotes to compare: Different companies offer the same insurance products for different prices.
So, it isn't a bad idea for you to compare quotes so you can be sure that you are getting a good deal with whatever policy you choose to buy.
Price isn't the only deciding factor as well.
You won't want to end up with a cheap policy only to suffer a miserable claim and underwriting process, right? Exactly.
So, do your best to check out each company’s reputation for customer service as well.
Apply for the policy: After you’ve concluded on the policy and company, you can meet with the financial sales representative to submit an application and be ready to answer questions concerning your occupation, health and income level.
Pass the underwriting process: The underwriting process for disability insurance isn’t as demanding as when you’re applying for life insurance.
The insurance company will want to verify your income and interview you, either in person or over the phone.
A drug test might be required and would be carried out in the company’s office.
If you believe you’re a healthy and low-risk individual and quite certain that you’ve found the right company, then you can go ahead and make an initial payment at the time you apply.
Accept & sign the policy: This is a straightforward process where you can either sign the document and schedule payments or reject it if the underwriting results don’t come back as expected and have your initial payment returned.
As long as you’re an income earner, you should consider getting disability insurance.
It doesn’t matter if you don’t even have a family to cater for.
With disability insurance, you’ll be able to maintain positive cash flow if an injury or sickness takes you out of work for a few months or more.
Contrary to what most people think, you don't even need to have a high-risk job or work in a dangerous environment to have disability insurance.
All you need is to have a job that provides enough income that you won’t feel comfortable losing if you’re unable to work.
Even if you choose to rely on the free disability insurance provided by your employer, it's still not going to provide enough coverage for you.
In the end, having some disability coverage is better than none.
One of the smartest financial decisions you should make for you and your family is to protect your paycheck.
Besides, even the statistics alone are enough to give you an idea of how many Americans need this type of valuable protection.
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