WHEN PEOPLE THINK of their most valuable asset, they usually think of their home or investment portfolio. But for most, it really is the ability to earn a living.
Consider what your financial life would be like if you weren’t able to work due to a disability for any length of time.
Becoming disabled isn’t a far-fetched possibility either. Disability doesn’t result just from a horrific accident, but also from back injuries, cancer and heart attacks. According to the Social Security Administration, 1 in 5 Americans currently live with a disability, while more than 1 in 4 20-year-olds become disabled before reaching their retirement age.
Disability insurance may help provide you the income you need during a difficult time should you become disabled. This type of insurance can be purchased as an individual policy from an insurance company. Your employer also might offer coverage.
There are some key concepts to understand about disability insurance. There is usually a wait after the onset of a disability before you receive benefits. This is called an elimination period. It typically ranges from 30 to 365 days.
The disability benefit can be paid for a lifetime. Coverage like this can be very expensive. Some policies will pay benefits up to age 65. Policies that pay benefits for two- and five-year periods also are available.
At times, an individual might be only partially disabled. Some policies will offer a rider that will pay partial benefits under these types of circumstances.
Other provisions could include cost-of-living increases for benefits. Review the features of your disability coverage to check what is offered and to understand your coverage.
Most disability insurance coverage exists through individual coverage, group association policies, and riders attached to life insurance policies. Private disability policies are usually more comprehensive in terms of benefits than a group policy. They usually come at a greater cost. Premiums generally can’t be increased, and you will lose the coverage if you don’t pay the premiums. If you pay the policy premiums with after-tax dollars, the benefits are usually tax free.
The advantage of a private insurance policy is that you can always take it with you. You are covered as long as you pay the premiums. This contrasts with a policy your employer might provide. Here, if you leave your job, your disability coverage often goes away.
When reviewing your particular insurance, consider the following:
• How long do the benefits last once you become disabled? Are there additional limits that depend on the type of disability? For example, is there a different time limit if the disability is due to an addiction?
• How much of your income does the policy replace? Policies typically pay a benefit equal to 50% to 70% of your gross monthly base salary. The benefit also might be capped at a monthly amount.
• What is the definition of disability? Generally you must be under the care of a doctor due to an illness or injury that impairs your ability to work in either “your own occupation” or in “any occupation” for which you might be qualified based on your education, experience, training and past earnings. The definition of disability might be a combination of these — your “own occupation” for a certain period and “any occupation” for time frames thereafter.
It is important to look at other aspects of your financial life to determine if the disability income benefits will be enough to get you through the tough times. Areas to consider are the expenses you could reduce if disabled, your cash reserves and your other sources of income.