How To Buy Disability Insurance And Why You Want It

What is your most valuable asset?  

If you said “My ability to earn an income.”, You’re correct!

So how do we insure your income earning ability?

Why you want income protection insurance

If you’re reading this, you’re most likely still in the work force and heavily rely on your paycheck. So what have you done to make sure you can make ends meet if you were to become disabled? How do you make the rest of the dreams work if finances become an issue? How long can you go without a paycheck?

I know what you might be thinking.  “I’m young, healthy and work at a desk job. Maybe it can happen to someone else, but not me.” But one thing to keep in mind, is:

“Majority of claims are due to illness, not accidents and more than a third of millennials couldn’t last three months without their income.”

According to the Social Security Administration, one in four 20 year olds today, will experience a disability for more than 90 days during their working careers. Most disability claims are due to heart attacks, diabetes, back injuries, cancer, and other illnesses. With nearly 18% of Americans currently living with a disability. The average SSDI benefit for ages 25-34 is $801 per month. That’s all one would get, if they lost their paycheck due to a disability and there was no other income bucket to draw from.

“40% of millennials would consider disability insurance if they knew more about it.”

What is disability insurance and how does it work?

Disability insurance also goes by disability income insurance, income protection, or simply DI. This insurance policy pays a benefit based on your income if you can’t work for an extended period of time due to an injury or illness.

Short-term and long-term coverage. They are designed to replace a percentage of your monthly base salary up to $17,000(max coverage from most companies), while you’re on a disability claim. When you start recovering and can get back to work, some long-term disability insurance plans pay additional benefits. For example, if you come back to work, but are not able to perform at your full capacity, the plan would cover the losses until you’re fully on your feet.

One of the most important things to consider when shopping for disability insurance, is the language and definition used as a requirement to qualify for a disability benefit. The policy will have its own definition of total disability, and this will determine if the benefit will be paid out or not. Will the policy cover your own specialty? So if you’re a physician, and become disabled and can’t perform your specific job, can you go on claim AND go to work doing something else?

What would this mean for you?

If you’re unable to work in your own specialty, due to a sickness or injury, you would be eligible to receive benefits up to the maximum benefit period stated in your policy. Benefits are payable even if you are able to work in another specialty or occupation.

Here’s an example.

A surgeon who is disabled from performing surgeries, but can perform the duties of a general physician or even medical director for a local insurance company, will be deemed disabled and receive full benefits under the policy definition.

How to buy disability insurance

Option 1. Ask someone in the human resources department at your job if your employer offers disability insurance. Many employers offer a plan to their employees as a benefit, and some even cover the cost; fully or partially. Disability insurance isn’t as widely available as a benefit from your employer, in comparison to life or health insurance. If they do have it, they are less likely to understand the benefits of the policy and the true definitions used. In the case of an employer paid plan, you would pay tax on the benefits, because the employer wrote it off on their taxes.

Option 2. If your employer doesn’t cover the cost for disability insurance, find out if they offer it as a voluntary benefit. This gives you the option to buy a disability insurance plan at a group rate.

Option 3. You can buy an individual/portable disability insurance plan directly from an insurance broker. Ask them about all the available options. Since you’re paying for it, the benefit is tax free to you if you go on claim. 67% of the private sector don’t have long term disability insurance, so you will most likely need to go this route.

Buying an individual disability insurance policy

If your employer sponsored plan doesn’t cover your full salary, the employer doesn’t offer the benefit, or you’re self-employed and don’t have the coverage, you might consider purchasing an individual policy.

The Price is based on:

• Your income
• Age
• Health
• Gender 
• Smoker or non-smoker
• Length of waiting period
• Occupation risk
• Disability definition
• Duration of the benefit the company promises to pay
• Other add-ons(riders).

Riders are benefits you can add to your policy for a fee. Here are a few examples:

• Annual cost-of-living adjustment – Adjustment for inflation.
• Enhanced Residual Disability – Paid if the insured is no longer disabled but continues to experience a loss of income and this loss is solely the result of the previous injury or sickness that caused the disability.
• Survivor Benefit – This rider is designed to provide a benefit to your beneficiary or estate, if you die while receiving Disability Benefits.
• Rehabilitation – This benefit applies when the insured is totally disabled and receiving benefit payments. If the insured chooses to participate in a vocational rehabilitation program approved by the insurer, then total disability benefits will continue as long as the insured actively participates in the training program and remains totally disabled.
• Non-Cancelable – The coverage continues, as long as you pay for it.

Determine how much of your income you would need to replace to maintain your current lifestyle, in the event of a total disability. How many months could you go without out a paycheck before you would need the benefits to kick in? How long would the benefits need to last?

You can find other information and stats here.

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