Ask most people to think about their most valuable asset, and they’ll mention their home, their car, their jewelry, or other possessions. But for most of us, our most valuable possession isn’t any one of those things. It’s our ability to earn a living. And just as you would insure your car, your home, and other valuable possessions, you need to insure yourself in case you are no longer able to work. That’s what disability insurance does. It provides a source of replacement income if you’re unable to work due to an illness or accident.
If becoming disabled may seem unlikely, the odds may surprise you. Roughly 3 in 10 Americans will suffer a disability lasting 3 months or longer before the age of 65. Nearly 1 in 5 Americans will be disabled for one year or more during their working years. A Harvard study* found that over half of all personal bankruptcies and mortgage foreclosures are due to disability. It’s shocking that in the richest nation in the world, many people are within six weeks of personal bankruptcy.
For many, a sudden interruption of income could have serious financial consequences, Ask yourself: would you be able to maintain your standard of living if you were too ill or injured to work for an extended length of time? Half of all home foreclosures in the United States result from disability as do an alarming number of personal bankruptcies. Simply put, if you have a job you likely need disability insurance.
The other thing to keep in mind is that an accident or illness that keeps you out of work for a period of time can be very costly. That’s because people who become disabled not only need to continue providing for loved ones, but for themselves as well. A disabling injury or illness could lead to medical bills, modifications to your car or home, or other unforeseen needs that can be quite expensive. For all these reasons, almost anyone who works – whether they’re single, married, with children or without – should consider disability insurance.
Long Term Disability Insurance
Long term disability insurance (also known as LTD) is defined as insurance with an elimination period of at least 90 days. The benefit period (time when benefits are paid after satisfying the elimination period) is typically 2 years, 5 years, 10 years, to age 65 or lifetime. The longer the benefit period, the higher the premium. Long term disability insurance is intended to cover more catastrophic types of claims that last a long period of time.
Long term disability comes in both individual and group policies:
Group Disability Policies
Group policies tend to have benefit periods to age 65. It is important to read the group policy carefully and to be aware of the definition of disability. A group policy typically requires the claimant to be totally disabled and not working before a claim is paid. Furthermore, if the employer is paying the premiums, the benefits paid are taxable.
Individual Disability Policies
For an individual disability insurance policy, a 90 day elimination period tends to be the most cost effective elimination period for a long term disability policy. Depending on the company and policy, a 60 day elimination period premium may cost as much as double that of a policy with a 90 day elimination period. Instead of paying the significantly higher premiums, you would probably be better off putting the extra money in a savings account to have funds available to you.
Long term individual disability insurance tends to be more expensive than a group policy, but is more comprehensive. It usually requires medical and financial underwriting to qualify. The definition of disability tends to be more comprehensive, covering you in your own occupation or medical specialty and has more riders available.
Short Term Disability Insurance
Short term disability insurance is usually in the form of a group disability policy through an employer. To purchase short term disability insurance as in individual can be very expensive. Short term disability policies typically start after 7 days and have a benefit period of 6 weeks to 6 months, depending on the policy. Sometimes short term disability insurance is also called sick pay.
How do you decide if you need short term or long term disability?
If only the answer were easy! If you actually knew how long your claim would be, you would know how long you needed the benefits. However, the best way to assess is to look at your financial situation and determine how long you could survive without your income.
If you are young and new in your career, you may not have much money in savings or in a retirement fund. You also have a potentially longer period of vulnerability and therefore may need a longer benefit period.
If you are considering a long term disability insurance policy and have a significant amount of money saved for retirement, you may be able to consider a shorter benefit period to cover your risk until you are able to tap your retirement savings without penalties.
For more information about short term and long term disability insurance, please contact Set for Life .
- Set Up a Budget
The first step in developing a plan of action is determining your monthly income and expenses in the event of a disability. Use take home pay as income and fixed expenses to determine your needs. Keep in mind that individual disability insurance benefits are non taxable if you pay with personal income.
- Assess Your Income
Be aware of other (or lack thereof) sources of income. Your greatest asset is your ability to work and earn an income. Without that, alternative sources of income can help support you and your family’s lifestyle and financial security.
Potential Earnings to Age 65
(with 5 percent annual salary increase)
Age $50,000/year $100,000/year $150,000/year 30 $4,516,000 $9,032,000 $13,548,000 35 $3,322,000 $6,644,000 $9,966,000 40 $2,386,000 $4,773,000 $7,159,000 45 $1,653,000 $3,307,000 $4,960,000
- Determine the Financial Impact of a Disability
Disability can drain your family’s savings and jeopardize your financial security. When you’re disabled, you may not only lose your ability to earn a living, you could also lose your savings, your retirement funds and even your home.
*Health Affairs, the Policy Journal of the Health Sphere, February 2, 2005