It’s easy to see our homes and investment accounts as the most important parts of our portfolios. After all, that’s what we spend most of our time talking about with Gen Y Planning clients.
But really, the most reliable and important asset most of us have is our ability to work.
So what happens if you become ill or get injured and are no longer able to work in your field? That’s where disability insurance comes in. These policies pay out when you are unable to work for any amount of time, whether it’s a few months or the rest of your career. They’re more common in some fields than others, but most occupations are eligible for coverage.
Disability insurance is especially important if you’re the primary breadwinner in your home, if you’re self-employed, or if you’re actively paying off debt. Having coverage can help you keep progressing toward your financial goals even during illness and injury.
“One in four 20-year-olds will become disabled before reaching retirement age, and the average claim for disability is about 2.5 years,” says Kathy Bilodeau, Disability and Critical Care Specialist at insurance advisory firm LLIS. “If you’re earning an income and you can’t live without it, you need to insure it.”
Short-Term Disability Insurance
Short-term disability insurance kicks in to cover part of your income for a short period of time, typically up to six months, while you recover from a non-job-related illness or injury. (If you get injured on the job, you’d probably receive workers compensation, too.)
Some companies offer short-term disability insurance as an employee benefit. These policies might cover you as you recover from surgery or if you face an illness requiring hospitalization or frequent treatment.
Some group policies include a maternity benefit, which will pay out for a certain number of weeks after you give birth, but most individual policies don’t, unless you are disabled. Your plan should clearly explain what’s covered and what isn’t.
“If they have it, definitely sign up for it, particularly if it’s employer-paid,” Kathy says. “But remember that it may not cover commissions or bonuses. If you rely a lot on bonuses, you want to make sure that’s covered in your disability insurance plan.”
If you’re self-employed or own your own business, consider purchasing your own short-term disability coverage. These policies are generally inexpensive, Kathy says, because they often only need to cover a few months.
“If you’re not a good saver, you probably need to have short-term disability in place,” Kathy says. A short-term policy can help you keep up with your bills without cleaning out your savings.
Long-Term Disability Insurance
By this point you might be wondering: What about Social Security? Yes, supporting you after you’re no longer able to work is part of what Social Security does. But you have to be permanently unable to do any kind of work to qualify for SSDI. That leaves out lots of people who are partially or temporarily disabled.
Long-term disability insurance kicks in after you have been disabled for a certain period of time, typically three to six months, or at the end of your short-term disability policy term.
Depending on what riders your long-term disability policy includes, it can help replace your income if you need to take months or years off while receiving treatment for an illness like cancer. It can also help supplement your income if you have to cut back on work due to diagnosis or treatment.
Long-term disability policies typically pay 60% to 70% of your gross monthly income. If you become permanently disabled, long-term disability insurance policies either pay out for a prescribed period of time, such as 10 years, or until you reach an agreed-upon retirement age, like 65.
Riders On Long-Term Disability Policies
Long-term disability policies can include a bunch of different riders, which make policies customizable to whatever your circumstances are at the time of application.
Common riders include a cost-of-living adjustment, meaning benefits increase to keep up with inflation while you’re receiving benefits.
The future increase option allows you to increase your benefit amount as your income grows without any additional medical underwriting — but note that your premiums will increase, too.
“There are a ton of riders on a disability plan,” Kathy says. “The beauty of disability insurance is that there are a lot of moving parts to it, so we can tailor a plan specifically to the client’s situation.”
Other important riders include:
Own Occupation
Own-occupation policies cover the specific work you do on a day-to-day basis, rather than any work you could theoretically do after becoming disabled.
For example, say you’re a surgeon. If you were to lose the use of one of your hands, you probably wouldn’t be a surgeon anymore, even though you might be able to teach or see patients in other settings.
An own-occupation policy would reflect your pre-injury salary, not your new one, whether or not you choose to go back to work in some capacity.
“The people who come to us who are professionals, if they really love what they do and they’ve paid a lot of money to get there, they don’t want to stay home,” Kathy says. “This is their calling, this is their dream, they want to get back to work.”
Partial Or Residual Benefit
“The most important rider, beyond own-occupation, is the residual rider,” Kathy says. “I call it the safety net. We don’t know what’s going to put someone out on claim. We don’t know if that claim is going to be a total disability or a partial or residual one. If you’re partially disabled and you don’t have this rider, you may not be able collect benefits.”
Partial or residual benefit riders kick in when you can still do your job but can’t work as much as you used to. Whether you miss work occasionally due to ongoing treatment for an illness like cancer, or have to cut back permanently due to a condition like multiple sclerosis, a partial claim can supplement your lost income.
Catastrophic Benefit
If you have a debilitating injury, a catastrophic benefit rider can cover the costs of in-home healthcare or other daily services that you didn’t need before your injury. This rider kicks in if you experience a catastrophic brain injury, if you physically lose a limb (or the use of a limb), if you lose your vision or hearing, or if you lose the ability to perform two or more activities of daily living, such as bathing or dressing.
The CAT rider pays out a monthly benefit on top of the basic benefit, sometimes nearly as large as the monthly benefit, Kathy says.
“If you’re catastrophically disabled, insurance companies think you’re probably not going to work again and you’re probably going to need some additional money to offset medical bills or make some modifications to your home.”
How to buy disability insurance
Short-term disability is a pretty common employee benefit and can cover as much as 80% of your income for a few months. If you work in California, New York, New Jersey, Rhode Island or Hawaii, employers are required to offer short-term disability coverage. If you’re in another state, ask your human resources department for details.
Some employers also include long-term disability insurance coverage as an employee benefit. You may also be able to purchase a group long-term disability policy through your company when you’re hired or during open enrollment if they offer supplemental benefits.
Remember, if you get insurance through your employer, the coverage may end when your employment ends unless they have a portability option. Employers can decide to stop providing coverage at any time and or insurance companies can cancel policies. And keep in mind that you’ll probably have to pay taxes on employer-paid disability coverage.
Buying your own policy allows you to customize it depending on your specific needs — which is why some people choose to buy their own coverage even if their employer offers one.
Plus, if you own the policy, your benefits are tax-free.
“Individual coverage is a lot more comprehensive,” Kathy says. “It’s not tied to your job. If you leave your job, it goes with you across the country. It’s kind of like a shadow — it follows you wherever you go.”
If you’re self-employed or want coverage beyond what your company offers, you can buy it directly from an insurance company representative or work with a broker for help. You might also be able to find group coverage through a professional association.
Like life insurance, you’ll have to go through a medical underwriting process, which can feel pretty invasive. Medical underwriting involves answering health questions, giving a blood and urine specimen, providing access to your medical records and prescription history.
You will also need to be underwritten financially since the carrier is replacing lost income. This involves the insurance company reviewing your tax returns, W-2s, pay stubs, and similar documents.
As for how much it costs? The cost of long-term disability insurance premiums varies depending on your income, age, occupation, and lots of other details, but most people spend 1% to 3% of their annual income. The younger you are when you sign up, the lower the premiums are likely to be.
