Disability insurance is an often unnoticed but vitally important step in financial planning. Disability insurance provides a layer of protection for an asset you use almost every day of your life: your income source – your ability to work. In this blog post, we’ll look at what disability insurance is; why it’s important; the various types of disability insurance policies that exist; and how to choose the policy that’s right for you.
What is Disability Insurance?
Disability insurance can help you stay afloat without a paycheck. Disability insurance replaces a portion of your income when you are unable to work because of sickness or injury, or due to a medical condition. Disability insurance is the kind of protection you buy to pay the bills and maintain your living expenses if you are too sick or hurt to earn a paycheck.
Key Features of Disability Insurance:
Monthly Benefit: How much income you will receive while disabled – usually a percentage of wages you earned prior to becoming disabled. Examples: 60, 50, 70 per cent.
Waiting Period: The time that elapses between the onset of disability and receipt of benefits. Periods are most likely to be from a minimum of 30 days up to 90 days.
Your Benefit Period is the number of months you will collect benefits while out of work (with a minimum of five years and a maximum of until your retirement age).
The definition of Total and Permanent Disability includes one of two conditions: (1) the inability to engage in any occupation for which you are or might reasonably be qualified by reason of education, training or experience, similar to any occupation for which you were previously qualified, based on your age, education and training; or (2) if the proceedings instituted for recovery against the party by whose negligence the loss occurred are concluded, but even if judgment therein is rendered for a sum in excess of $5,000, you are unable to perform any of the material duties of your own occupation based on your physical or mental condition. Disability Benefits used to refer to weekly or monthly payments, but regulators discourage companies from paying benefits on a weekly or biweekly basis. Disability Benefit Commencement Date is often after the date of injury, although there can be exceptions. Disability Benefit Eligible Employees are those who work a certain number of hours per week. Disability Benefit Eligible Occupations, Covered Exclusions, or Exclusions Clause usually pertains to certain types of illnesses or methods of injury.
Why is Disability Insurance Important?
Many among us grossly underestimate their odds of experiencing a period of disability during their working years. The Social Security Administration reports that one in four 20-year-olds will be disabled before retirement age. It is essential to have disability insurance in place so that you can continue to make your mortgage payment, turn on the lights, and feed your family when you are unable to work.
The Financial Impact of Disability:
Loss of income: the risk of losing pay due to an injury or illness that affects your earning capacity is vastly different if you have disability insurance versus not having it, particularly if you have dependents or large debts.
Savings exhaustion: How much can you afford to spend each month? Will your savings last long enough to preserve your standard of living throughout your period of disability, or are you at risk of financial catastrophe?
Accumulation of debts: Without an income, you might find you need to rely indefinitely on credit cards and loans to cover expenses and incur debts.
Types of Disability Insurance
Different disability insurance policies exist to suit different situations. If you know what options are out there, you should be able to choose the plan that best meets your needs.
Short-Term Disability Insurance:
Summary: Provides assistance for a limited time, generally between 3-6 months, after a disability.
Benefits: Covers temporary disabilities, such as recovery from surgery or a short-term illness.
Considerations: Often offered as an employer-sponsored benefit, with limited coverage duration.
Long-Term Disability Insurance:
Benefit: If disabled for a sufficiently long period of time, which may be only a few months, you are eligible for benefits until your death or retirement age.
Pros: Long-term financial coverage for a serious disability that keeps you out of work for a long period of time.
Considerations: Typically more expensive than short-term policies but provides more comprehensive coverage.
Group Disability Insurance:
Synopsis: Coming as part of a package of employee benefits at a discounted price.
Pros: Basic coverage cost belongs to an affordable health insurance plan that encourages an individual Compare to individual to buy additional coverage.
Considerations: Coverage amounts may be limited, and benefits are typically taxable.
Individual Disability Insurance:
Overview: Purchased independently from an insurance provider, allowing for customized coverage.
Benefits: Offers tailored protection, including higher coverage amounts and tax-free benefits.
Considerations: Typically more expensive than group policies but offers more flexibility.
Choosing the Right Disability Insurance Policy
Choosing a disability insurance policy that works for you comes down to what you need as protection for your finances, lifestyle, and work situation. Here are some factors to consider:
Assess Your Income Needs:
Estimate Your Expenses: Total your expenses every month, such as your mortgage or rent, utilities, food, and other necessities.
An Obligation Trail: Forecast the future financial obligations you will have during your marriage so that your coverage is sufficient to cover these expenses (e.g., for your children’s educational expenses or your retirement savings).
Understand the Policy’s Definition of Disability:
Own occupation vs any occupation: Some policies will pay you benefits if you cannot do your job, but will pay only if you cannot do some other job for which you are reasonably well-qualified (any occupation).
Partial disability: Look for policies that pay out on partial disability so that you receive some benefit if you can work part-time.
Evaluate the Waiting Period:
Shorter Waiting Periods: Provide quicker access to benefits but may result in higher premiums.
Higher Deductible: Lower premiums but you pay for claim expenses up to the deductible amount. Longer Waiting Periods: Lower premiums but you must wait for a specified period of time before you can make a claim. Savings Plan Insurance: Lower initial premiums and deductibles but you must save a specified percentage of a monthly fee.
Consider the Benefit Period:
If you have other earnings or a big emergency fund, then your need for long-term insurance could be shorter.
Term certain: While many providers now offer coverage past age 85, people with serious debt or dependents might need coverage that extends to retirement age.
Review Policy Exclusions and Limitations:
Pre-Existing Conditions: Many policies do not cover disability due to pre-existing conditions. Exclusions should be clear.
Gaps in Coverage: Loss of Coverage: What happens if you lose your job or can no longer work because of depression? What provisions does your insurance have related to disability due to mental health conditions? Do you need to look into supplemental coverage?
Conclusion
Disability insurance is a critical component of any sound financial plan, providing protection against the personal and economic consequences that come with losing your ability to work. Understanding your options for obtaining disability insurance and selecting the right policy for your needs can help you bridge any potential disability gap and protect your family and lifestyle in the event of a disability.
Protect yourself or your family as you enter or begin the job market, build a career, or plan for retirement with disability insurance. No matter what the outcome may be, you’ll have the means to help your family survive and thrive.
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