While life insurance is something that most people are aware of and many people buy (find out The Perfect Age to Get Life Insurance), people under the age of 65 are far more likely to suffer a disability that makes it difficult or impossible for them to work and this can actually be an even bigger financial blow to their families than death. At age 30, you are roughly four times more likely to be disabled by the age of 65 than you are to die by that time. Even after 30 the risks are high: over the course of your entire working career, you are more than three times as likely to be disabled than to die by the age of 65.
What Counts as a Disability?
So just what is a disability in the context of insurance? Essentially, it's any condition that renders you unable to perform your job. These range from the things we colloquially refer to as disabilities, such as physical injuries suffered at work, back injuries, and mental or nervous conditions including those caused by drug abuse, to a number of other debilitating conditions, such as cancer, chronic fatigue syndrome, carpal tunnel syndrome, heart disease, infectious diseases, and chronic conditions like arthritis. While a handful of specific items might be excluded from your policy and you should always carefully read it before buying, coverage is broad.
What are the Typical Limitations in a Disability Policy?
The first limitation in a disability policy is the time limit that you must meet before you can make a claim. If, for instance, you come down with a case of the flu and miss a week of work, you cannot collect on your disability policy even though your illness caused you to lose some income. Typically, the minimum period of disability—meaning inability to work—must exceed 30 days before a claim will be considered. But waiting periods can be considerably longer than this, even as long as two years. The advantage to the longer waiting period is that they come with a lower premium (the amount you pay every month for your insurance).
Pre-existing conditions are also excluded. In most cases, before an insurer will issue a policy to you, you must undergo a physical examination by a medical doctor. If you have existing health problems, the insurer might still be willing to write a policy for you but will not cover those problems. This is one of the reasons it's advisable to take out a disability policy while you're young and healthy. If you wait until you're approaching, let's say, age 50, you might end up with an uninsurable disability that would have been covered had you been insured before getting it. And, of course, things like traumatic auto accidents happen to people of all ages.
Some policies have a lifetime dollar maximum that you can collect and some policies have time limits. There are different options available: you can buy a policy that will compensate you only for a few years, that will pay until you are 65, or that will cover you for your lifetime. Obviously, the longer the policy promises to pay, the higher your monthly premium will be.
How Much Should I Get?
How much a policy pays out per month depends on how much you pay in premiums. Most people need 65-75% of their income to cover their essential financial commitments. If the premium that provides this level of protection is more than you can afford, any level of protection is better than none. You could also consider reducing your premium by increasing the waiting period before you can collect or reducing the time period for which the insurer will provide disability payments. Note also that payments made under private disability policies are not taxed. So, when calculating the amount of coverage you want to buy, you don't have to factor in the taxes.
If you can afford the premium, you should also consider the fact that some policies can serve as investments. At the end of 10 years, the insurance company will return to you 80% of the premiums you have paid less any claims they paid out to you. For a higher premium still, the insurer will return 100% of the premiums paid less claims.
Employer-provided and Social Security Disability Insurance
If your employer is one of the few that provides disability insurance, great! But many such policies pay minimal amounts and the amounts paid are taxable if the employer pays the premiums. To adequately protect yourself you probably need to get your own policy to supplement your employer-provided one. Plus, few people keep a job for life. Your private policy stays with you no matter who your employer is.
Payments from Social Security Disability Insurance are also typically small and the criteria for collecting are much stricter than those of private policies. You might not be able to collect from the Social Security system for many disabilities.
Suffering a disability that leaves you unable to work for an extended period of time can be financially devastating to you and your family. The ideal time to buy a policy is when you are young and healthy. Premiums can be surprisingly low. Get a quote!