Disability Insurance 101
February 24, 2016

Disability insurance replaces a portion of your income if you are unable to work due to an accident or prolonged illness. It's usually broken into short-term insurance (typically one month or less) and long-term (anywhere from a month to a lifetime). Short-term disability insurance usually covers 60-70% of your salary at the time of the disability; long-term disability insurance typically covers 50-60%.

What sort of disability coverage do you need, and what types are available? First, ask yourself:

  • What are your monthly expenses, and how long could your family live off of savings or other assets if you're disabled and unable to work?
  • Are you the only source of income in your family?
  • What coverage, if any, do you get from your employer?
  • Does your job (or your lifestyle) contain enough risk to make a disabling injury a reasonable possibility?
  • What Social Security Disability benefits would you qualify for?
  • How much can you afford to pay for supplemental disability insurance?

Most of us conclude we need some coverage after considering these points. However, just as in the current health insurance debate, younger and healthier workers are less likely to seek supplemental disability insurance, or even consider what they're eligible for. Yet the numbers show that younger workers would benefit more from long-term disability insurance (due to a longer remaining life span).

Consider this: according to the Health Insurance Association of America (HIAA) brochure An Employer's Guide to Disability Income Insurance, at age 30 the average male is 4.1 times more likely to acquire a long-term disability than to die. The ratio drops to 2.9 at age 40 and 2.2 at age 50. It is reasonable to assume that the women's risk curve is similar.

Should you decide that you need disability coverage, there are several forms to evaluate:

  • Employer-based Coverage - Many employers offer some disability coverage as part of their benefits package. It could be short-term, long-term, or some combination.

  • Worker's Compensation - "Workman's comp" is state-mandated insurance that covers lost income as well as medical expenses for injury/illness at work. However, this doesn't cover events outside the workplace, where most disabling events occur.

  • Social Security Disability Insurance (SSDI) - SSDI benefits have very stringent qualification requirements. In fact, only about half of the applicants are accepted. Benefits are calculated similarly to retirement benefits; your check is based on your salary and number of years of employment.

  • State disability funds - Some states have separate disability protection; check with your state Department of Insurance. State programs usually cover only short–term disabilities.

  • Private plans - These are underwritten by commercial insurers with rates based on your individual risk factors. A variety of coverage is available. One provider uses a quacking duck to peddle its wares.

As you consider your options and decide what coverage is right for you, other factors to keep in mind are:

  • With a limited cushion of savings, make sure you have short-term as well as long-term disability insurance.

  • Long-term disability typically kicks in 30 to 180 days after a disabling event, after short-term benefits are exhausted. You may need a rider to cover gaps between benefits.

  • Check the definition of disability in the policy. Private policies usually define it as being unable to work in the career you were trained/qualified for, but may switch to being unable to work in any occupation for benefits to continue. Inability to work in any occupation is required for SSDI benefits.

  • Your employer-based benefits may be taxable if they're part of a pre-tax payroll deduction.

  • Check the policy provisions for things like the end-of-term definition on long-term insurance (often age 65), and premium options. For example, "guaranteed renewable" policies allow rate increases, "non-cancelable" policies do not allow increases but have higher premiums.

  • Like any insurance purchase, do not be afraid to shop around for competitive rates. Even if you decide to purchase supplemental insurance, we hope you never need to make a claim!
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