If you’re like most people, you’ve heard of disability insurance but you may not understand the ins and outs of how such plans work or why they’re important. The truth is that disability insurance coverage doesn’t need to be complicated, but it is something that every working person should have.
Disability Insurance: The Basics
In short, disability insurance coverage is designed to protect your income if you were to become disabled due to injury or illness and be unable to work.
While every disability insurance policy is different, you should typically expect to get a higher quality of protection and coverage than available to you through Social Security disability benefits or your employer’s workers’ compensation plan (for on-the-job injuries).
The Reasons Why Disability Insurance is So Important
If you’re like many people, you probably think that the odds of needing to miss work for months or years due to a serious illness or injury are small–particularly if you’re currently young, healthy and work behind a desk.
However, the Social Security Administration reports that a quarter of all 20-year-olds will face a disability lasting for more than three months before the age of 67.
Moreover, relying on disability benefits through Social Security is risky. On average, only 28% of all first-time Social Security disability applicants are awarded benefits, with more than half of all applicants denied benefits altogether.
Even if you are granted disability benefits through this governmental program, you may not receive enough to cover your family’s monthly expenses. Social Security Disability Insurance (SSDI) benefits are based on your average lifetime earnings, not the severity of your disability or your current income level; the 2018 average SSDI payment is $1,197 per month.
What’s Covered by Disability Insurance
The specifics of what is included in disability insurance coverage varies from plan to plan, and there are various kinds of disability insurance plans to be aware of. We will focus on two common types of plans in this article: Group Short-Term Disability & Group Long-Term Disability.
Group Short-Term Disability is offered by an employer to employees on a company-wide basis, and can be employer paid or employee paid. This insurance is designed to cover temporary disabilities that prevent the policy holder from working but which do not create ongoing or permanent disabilities; the exact timeframe for benefits will depend on the particular policy, but most short-term disability plans include coverage for a few months or up to a year.
Benefits generally replace between 60 and 70% of the policy holder’s base salary, though a cap on monthly benefits (such as $10,000) sometimes applies. When seeking to utilize short-term disability benefits, there’s usually only a short waiting period between the time that the disability occurs and when benefits are paid out, often two weeks.
Group Long-Term Disability functions in a similar manner as Group Short-Term Disability, with the main difference being that it provides benefits for a longer duration. Under such plans, benefits continue as long as the disability does up to a predetermined number of years or until retirement age.
The monthly benefits provided by a Group Long-Term Disability plan typically equal between 40-60% of the policy holder’s base salary (and is potentially subject to benefit caps as with Group Short-Term Disability plans). The waiting period between the onset of the disability and the start of benefits is often longer for long-term disability plans versus short-term plans, generally about 90 days.
In the case of both Group Short-Term and Long-Term Disability insurance, how the policy defines “disabled” is extremely important and can vary from plan to plan. The strictest plans will only provide benefits if the policy holder’s disability prevents them from working any job that they can qualify for. Other policies only require that the disability prevents the policy holder from working within their current occupation in order to receive plan benefits.
Likewise, some disability policies also cover partial disability, meaning that they will pay the policyholder a portion of their entitled benefits if their disability allows them to work part-time; other plans will only pay out benefits if the disability prevents the policy holder from working entirely.
How to Obtain Disability Insurance Coverage
There are two main ways to get disability insurance coverage: you can either sign up for a plan through your employer or buy an individual plan directly from the insurance company or an insurance broker.
Many employers do offer Group Short-Term and Long-Term Disability plans. Sometimes these plans are employer-sponsored, meaning that your employer will pay some portion of the premiums; even if your employer doesn’t offer this benefit, you may be able to purchase coverage through your employer’s insurance broker and utilize the group rate.
However, if you are self-employed, don’t receive disability coverage through your employer, or your employer-sponsored plan doesn’t provide adequate coverage, buying an individual disability insurance plan is a smart move.
One important point to consider is that employer-sponsor coverage typically only pays a portion of your current base salary up to a predetermined cap; that means if your salary is much higher than the cap or bonuses and commissions make up a significant portion of your overall compensation, you likely need supplement coverage.
Whatever the source of your disability insurance coverage, keep in mind that you generally cannot replace more than 75% of your income.
Choosing an individual plan, however, can allow you additional flexibility with coverage, such as building in annual cost-of-living increases and allowing you to receive benefits tax-free if the time comes.