The Fundamentals of Disability Insurance

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Disability pays benefits when you are unable to earn an income because your are sick or injured.  Most will pay a benefit that replaces a percentage of your earned income when you cannot work.

Why would you need disability insurance?

Your chances of being disabled for longer than three months is higher than you think.  There are many statistics on the Social Security Administration’s website that shows the probability is a very real concern.  Consider what might happen if you are unable to work for days, months or even years.  If you are single, do you have other sources of income?  If you are married, you may be able to rely on your spouse for income, but you most likely have many financial obligations such as supporting children or paying a mortgage. Could your spouse’s income support these needs?  Keep in mind, you don’t have to be working a dangerous profession to need disability insurance.  Injuries can happen anywhere, and illnesses can happen to anyone.

What you need to know about disability insurance?

Once you become disabled you typically must wait a certain amount of days before a benefit is paid.  This is called the “elimination period” and typically it is anywhere from 30 to 365 days although the most common is 90 days. If you are purchasing private disability insurance, you may choose different elimination periods in order to control policy costs.  Group disability insurance policies (workplace plans) typically have an 8-day short term disability waiting period and a will pay for 6 months. Long term policies through the workplace have a 90 day waiting period and will pay benefits until age 65.

You may purchase individual disability policies; these policies can help any shortfall your group policy may have. For example, your group policy may provide only 65% of your pay as a benefit. An individual policy may help address some of the 35% gap.  Individual policies can have 2 yr, 5 yr, or age 65 benefit periods.  Also, because many injuries or illnesses do not totally disable you, you can purchase a policy with a rider that provides partial benefits if you are able to work part time and collect some income.

Where can you get disability insurance?

In general, disability insurance can be split into two types: private insurance (individual or group policies purchased from an insurance company), and government insurance (provided through state or federal governments).

Private disability insurance is insurance you purchase through an insurance company.  There are many different types of private insurance, including individual disability policies, group policies and riders attached to life insurance policies.  Depending on the type of policy chosen, private disability usually offers the most comprehensive benefits but that comes with an added cost.  Check with our employer or association if you are eligible for group insurance.  If not, contact your insurance broker or financial advisor to consider individual coverage.

Workers’ compensation and Social Security are the two well-known government insurance programs.  In addition, five states (California, Hawaii, New Jersey, New York, and Rhode Island) have mandatory disability programs that provide coverage to residents.  In general, government insurance programs provide limited benefits with restrictive terms and you should not rely on them (as many people mistakenly do) as your main source of income if disabled.

It is important to have a disability income protection plan in place to ensure your income continues if the event of a long-term disability.  For many, this includes a combination or private disability policies. It is typically a mistake to solely rely on government-based programs since most likely they will not address your true needs.  LegacyShare is a perfect place to store investment statements or to notify your “keyholder” as to where documents can be found and who may be the beneficiary of your hard-earned assets.

Legacies are meant to be shared.

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