You have big plans for the future. Maybe you want to buy a first home, a vacation house or a boat. Maybe you want to retire early and travel around the world. Or perhaps you want to pay for your children’s college education so they’re not saddled with debt.
Whatever your plans are, they probably don’t include an unexpected disability. An illness or injury could prevent you from earning an income, and that could derail your big plans. It’s a real risk, and it’s why anyone who depends on a paycheck needs to understand the importance of disability insurance.
Why is disability coverage important?
If you had a one-in-four chance of losing your house to a flood, you’d probably want to protect it with flood insurance. If you had a one-in-four chance of needing expensive surgery, you’d want good health insurance. But, even though, according to the Social Security Administration, workers have a one-in-four chance of becoming disabled before reaching retirement age, many don’t protect their paychecks with disability insurance.
If an illness or injury prevents you from working, you won’t be able to earn a paycheck. Although you may think you have other ways of making ends meet, you may find out that you don’t have a reliable source of income when it’s already too late.
- Most workers have limited paid time off. You might not have any paid time off, but even if you have some, it’s probably not enough to cover a disability. According to the U.S. Bureau of Labor Statistics, 33 percent of private industry workers have 15 to 19 days of paid vacation days after 10 years at the company. That may seem good if you want to go on a summer vacation, but it likely won’t cover a serious illness or injury.
- The FMLA doesn’t guarantee paid leave. Under the Family and Medical Leave Act, eligible workers have the right to take up to 12 weeks of job-protected leave due to health issues. However, the employer is not required to pay the worker during this period, and many employers anticipate that workers will use disability insurance to cover their lost income.
- Savings can deplete fast. If you have savings set aside, you might think you’re ready for a worst-case scenario. However, keep in mind that disabilities may last for years. At the same time, you’ll likely face expensive medical bills. Once your savings run out, you’ll need another source of income.
- Workers’ compensation only covers work-related injuries. If you can’t work because of a work-related injury or illness, you can file a workers’ compensation claim to cover your medical costs and lost income. However, this option won’t help you if your disability isn’t related to work. If you develop cancer, have a stroke, or injure yourself while riding a bicycle, you’ll need another source of income.
- Few people qualify for Social Security disability benefits. Between 2010 and 2019, only about 31 percent of all Social Security disability benefits applications were approved, and many of those were only approved after a lengthy appeal process. The Social Security Administration has a strict definition of disability, and many people don’t qualify. If you can’t qualify for Social Security disability insurance benefits, you’ll need another source of income.
If you want to secure monthly income in case of disability, it makes sense to invest in disability income insurance.
How does disability insurance coverage work?
Disability insurance provides a monthly benefit if you experience a qualifying disability that prevents you from working. The monthly benefit replaces a portion of your regular income and can be used however you wish, just like your regular income.
It’s important to note that you may not start receiving disability benefits immediately. Before you can start receiving monthly disability benefits, the waiting period needs to pass. Also called the elimination period, the waiting period can be a couple of weeks or several months, depending on the type of disability income policy and its terms.
Also, your disability insurance benefits will only continue as long as your benefits period lasts. Some disability insurance policies have short benefit periods of a year or less, while other policies have disability periods that last for several years. Some policies will continue paying benefits until you reach retirement age, assuming you still qualify for benefits. There’s a great amount of variation, so it’s important to review policy terms carefully.
Disability Coverage Options
When you’re ready to buy a disability insurance policy, you have many coverage options to consider. However, you do not necessarily have to decide between options. Because different disability income insurance policies can meet different needs, it’s possible to buy more than one policy and stack coverage. This may also help you replace a larger percentage of your regular income.
Here are some of your options:
- Short-term disability insurance vs. long-term disability insurance. Short-term disability insurance policies are designed to cover disabilities that last for a year or less, while long-term disability insurance policies are designed to cover disabilities that last for years. With both types of policies, the elimination period and benefit period can vary.
- Group disability insurance vs. individual disability insurance. Some employers offer group disability insurance as part of their standard employee benefits package. These policies can be affordable due to group rates, but you may lose coverage if you switch jobs. Individual disability insurance policies can cost more, but coverage will follow you if you switch jobs and the terms are highly customizable.
- Regular underwriting vs. little to no underwriting. When you apply for individual disability insurance, you may have to go through a medical underwriting process. This is similar to what many life insurance policies require. However, some policies do not require medical underwriting, namely group or guaranteed standard-issue disability insurance options.
Should you buy disability income insurance?
Many workers will experience disability at some point during their careers. Even if you are healthy now, there may come a time when you cannot work because of a health issue. Without disability insurance, you may experience financial hardship on top of your disability.
When deciding whether you should buy disability income insurance, ask yourself the following questions:
- Do you have an income that deserves protection? Many people underestimate the value of their income because they receive it in small chunks, but when looked at over a longer period of time, your income may be your most valuable asset. For example, let’s say you earn $70,000 a year. Over five years, that’s $350,000. If you had another asset worth $350,000, you’d probably want to insure it!
- Do you depend on your paycheck? For most people, the answer is a resounding “Yes!” Even if you have some savings and you’re not quite living paycheck to paycheck, your long-term financial health likely depends on your ability to earn a steady income. A disability could deprive you of that ability, so it makes sense to buy disability insurance.
Now that you understand the importance of disability insurance, do you need help securing coverage? Our team at Higginbotham can help you obtain personal insurance policies that help protect your assets and safeguard your future. Talk with one of our disability insurance specialists today.
