How Do I Know If I Need Disability Insurance?
This primer on disability insurance will help you decide whether you should purchase it and what factors to consider should you decide to.
Deciding whether you need disability insurance for you, your family, and your business is an important consideration. Of course, you want to protect yourself against the unexpected, but you still need to determine whether it's a worthwhile investment. This article will cover the basics so you can decide for yourself.
Overview of Disability Insurance
Disability cuts your earning power, but even if you've been disabled and can no longer work, the bills keep rolling in. In fact, even more of them will probably be rolling in due to necessary medical care. Fortunately, disability benefits replace most of your regular income if you have a serious injury or illness that prevent you from working. This can give you peace of mind as few individuals have enough resources to survive beyond a year on savings. After that, life can take a turn from manageable to scary.
According to data published by Cornell University in 2012, 10.4 percent of people between the ages of 21 and 64 are disabled. Past age 64, that figure rises to 25 percent. Moreover, statistics indicate that a disability that lasts over 90 days usually continues for around three years but may last for much longer. Disability, then, is far from a rare occurrence.
Keep in mind, however, that there is no set definition for “disability,” and protection varies from company to company. Let’s look at the types of disability insurance available and what to look for in a policy.
Types of Disability Insurance Plans
Though there are a range of products available, most disability insurance falls under two basic categories: short-term and long-term. Generally, short-term disability policies cover up to two years, while long-term ones may last your entire life.
Within these two types of plans are two types of policies: non-cancellable guaranteed renewable and guaranteed renewable. Non-cancellable policies have fixed premiums throughout the contract period, and unless you do not pay your premiums, they stay in effect. On the other hand, guaranteed renewable policies can go up in price for an entire class or category, but they cannot single you out for a rate hike.
Group Disability Coverage
You, or your spouse, might have a group plan at your place of employment (see Group Health Insurance for Small Business Owners to learn more about group insurance plans). Sometimes, group disability coverage is available through professional associations, an alma mater, or business groups, such as a chamber of commerce. The Department of Labor also has disability compensation programs for federal workers.
Of course, the obvious issue with these plans is that you are only covered as long as you belong to the group, and it is not guaranteed to continue. Group coverage may also limit benefits due to exacting definitions of disability and maximum coverage amounts. The terms are set when establishing a group plan, although some plans offer limited flexibility. Lastly, you may also have disability coverage with your credit card, mortgage companies, or your auto insurance plan (see 9 Insurance Perks Your Credit Card Provider Might Offer).
Individual Disability Plan
By far, most disability plans are individual because they offer better coverage. Tailoring a custom disability insurance plan to your needs can provide guaranteed premiums. Plus, coverage does not end if you leave your job or quit an association (thinking of quitting your job? Find out What You Need to Know about Health Insurance Before Quitting Your Job).
Take a look at your expenses, including lodging, taxes, utilities, food, loans, and miscellaneous expenses. If you have a group plan that covers at least 60 percent of your pay; that may be enough. Don’t forget that most plans have a cap on monthly benefits, so whether you are making $30,000 or $60,000 per year, the maximum will be the same. You want to ensure your policy provides enough for you to live comfortably, and it is up to you to determine that amount (see also Disability Benefit Riders to Improve Your Coverage).
Business Disability Plan
Self-employed workers and partners have additional responsibilities to consider. Your disability could involve partners, employees, and the credit rating of your company. If you have a principal interest in a business, it needs to keep operating whether you are there or not. Taxes, wages, and accounts receivable could leave you in hot water and even lead to bankruptcy.
Disability plans for businesses make sense because they cover costs when you are not generating income. These can include overhead expenses, deferred income tax, loans, and interest. As a partner, you can also make provisions if your partner is no longer able to work so that you can buy them out. You can even go so far as to insure vital employees who work for you to avoid business hardship.
Policy clauses vary considerably from insurer to insurer. For this reason, understand what the premium covers and carefully read the clauses before you buy. The following are some important ones.
As no single definition exists for disability, you should know how an insurer defines it. Some consider you disabled if you are no longer able to work. Others pay benefits if your hours drop.
Benefits and Elimination Period
Make sure to check the monthly benefit amount for any policy you consider. Normally, this varies from 60 to 75 percent of your income. As mentioned earlier, a cap usually exists on your total monthly claim too. Moreover, there is almost always an elimination period during which you will not receive benefits. This can range from 90 days to two years. Generally, premiums are lower the longer you wait for benefits to kick in.
The length of time you sign for insurance also affects your premiums. Normally, the longer the policy, the lower the rates, but this varies from insurer to insurer. You can buy policies for as short as two years or coverage until 65 years of age.
Check to make sure you are not stuck with monthly payments on a policy that you are making a claim against. Most—but not all—policies waive the fee after 90 days of disability.
Having coverage is one thing, but making a claim is another. The claims procedure should be straightforward and simple. No one wants to deal with endless medical examinations and mounds of paperwork when they are ill.
Social Security pays disability benefits if you have worked long enough and you have a medical condition that meets the criteria. However, many people consider an individual policy for added protection. If you do opt for additional disability insurance benefits, you should know that Social Security or workers' compensation payments may drop if you claim.
It is important that benefits adjust with inflation. If they don’t, what you thought was ample coverage when you bought the policy may end being a drop in the bucket when you need to make a claim.
Does the policy allow you to increase your coverage if you need to and without requiring you to answer additional health questions? You may not need it now, but families and businesses grow and so do your financial needs.
By far, a custom disability insurance plan offers you the best coverage and the most flexibility. If you have some insurance now, look to fill in the gaps and check the clauses in the policies that you are considering. Don’t automatically go with your existing insurer either. Get multiple quotes from various companies as rates and options vary widely. Disability insurance is a good choice for anyone who has assets they want to protect. After all, you never know what might happen.