As you set your financial and investment goals, it’s natural to assume you’ll earn a steady income and make regular investments over time. However, what happens to your goals and even to your day-to-day financial security if you are unable to work or disabled?

The most effective way to protect a portion of your income is to buy disability insurance. You can use the disability insurance benefits, which you receive from your policy, as you want.

People can start obtaining disability insurance if they cannot do work or cannot do work they previously did because of their medical condition. Your employer may offer disability insurance at a low group rate or no cost to you. You may also be eligible for coverage through your spouse or partner’s employer and vice versa. Either way, a group plan is usually the most economical solution. However, if there’s no work plan or your employer’s disability policy won’t cover a large enough percentage of your total expenses, you may want to consider an individual policy.

Disability Insurance

What’s a disability?

Disability can be a double-edged sword. It reduces your income, and it may also increase your medical expenses. If others depend on your income, your disability may end up affecting their quality of life and prospects for the future as well. To protect your financial security and the people who depend on you, you can buy disability insurance.

Disability insurance is an agreement made between insurance companies and policyholders. The insurance company agrees to pay you a benefit if you suffer a disability that affects your ability to work in exchange for the monthly payments you make.

Insurers and the government are strict about what constitutes disability. For example, to qualify for Social Security disability benefits in 2017, you must not be earning more than $1,170 a month at any job, and your disability must be expected to last at least a year or to end in death. Some insurance policies apply stricter rules, but some are more flexible.

One type of disability policy called own-occupation or own-occ will pay you if your condition prevents you from doing your skilled work. So, if you’re a doctor, you can start receiving benefits if you’re unable to practice medicine, even if you can do other types of work. For that reason, own-occ policies are popular among skilled professionals and executives who are willing to pay the higher premiums. Other policies will not pay if you’re able to do any work at all.

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If you’re considering any policy, read it carefully to determine what it does and does not cover. For example, many policies exclude disabilities resulting from drug abuse, attempted suicide, or criminal actions on your part, and some may refuse to cover disabilities that result from a pre-existing condition.

Cost of disability insurance and how do benefits work?

The cost of disability insurance depends on several factors. For example, the amount you (or your employer) pay for the policy depends on the length and type of coverage, your health, the benefit amount, and other factors.

  • Benefit period. Disability insurance cost generally increases as the benefit period increases. You could buy insurance that would provide income for a year, two, or up to five years, or one that would pay benefits until age 65.
  • Your age. The older you get, the more likely you are to become disabled, so the cost of disability insurance increases.
  • Your health. You will pay more for disability insurance if you’re in poor health, smoke or if you or your family has a history of chronic conditions.
  • Your occupation. The more dangerous jobs, the more expensive to insure.
  • Benefit amount. The higher your replaced pre-tax earnings percentage, the more your disability insurance will cost.

The benefit is the amount you receive each month when you are disabled. Benefits usually continue until you can work again regularly.

Most disability policies pay a percentage of your monthly salary, usually between 50% and 70%, up to a cap or limit. For example, if you make $7,000 a month and your policy pays 60% of your income, you’ll receive a disability check of 60% of $7,000, which is $4,200. However, if the policy caps payments at $10,000, you won’t receive more than $10,000 a month, no matter how high your salary is.

Estimating expenses

To get a rough estimate of how much income you would need to replace, add up your expenses and subtract the amount that would be covered by your spouse or partner’s income and by investment income. Among the expenses to consider are:

  • Food
  • Clothing
  • Medical expenses
  • Car payments
  • Credit card payments
  • Loan payments
  • Utilities
  • Insurance premiums (home, car, health, and life)
  • Monthly savings and investment contributions

Types of disability insurance

There are two types of disability policies: short-term and long-term.

Short-term disability typically pays out a portion of an employee’s income for those who can no temporary work because of a disability. Insurance covers events when the employee intends to return to work after a few weeks, months, or a year. The most common illnesses for short-term disability: digestive disorders, back, and joint disorders, recovery after surgery. It is typically provided through an employer group plan. The typical policy lasts between three and six months.

Long-term disability benefits are paid out for the number of years indicated in the plan document. It covers serious injuries and illnesses that prevent working for several months or years. The most common causes of long-term disabilities: Arthritis, Back pain, Cancer, Depression, Diabetes, Heart disease, Stroke. Long-term benefits begin after any short-term benefits are wholly paid out.

Compare policies

Check for the following features as you compare policies:

Renewability. Some policies allow you to renew at the end of your coverage period.

Cost of living adjustments. Consider whether the policy increases benefits as the cost of living goes up.

Waiver of premium. This feature allows you to stop paying premiums on your disability policy while you’re receiving benefits.

Residual or partial disability. If you’re partially disabled and lose some, but not all, of your salary, this feature allows you to collect a portion of your benefits.

Waiting period

After you are disabled until you can start receiving benefits, time is called the waiting period. It takes a while for disability benefits to kick in — usually 90 days — but you can buy policies with shorter or longer waiting periods.

The waiting period for long-term disability benefits can range from weeks to months.  Before benefits kick in, for short-term disability, policies can take up to 14 days.

The longer the waiting period, also known as the elimination period, the lower the insurance cost. You’ll receive your disability checks at the end of the month, so a 90-day waiting period may translate into four months between the first day you’re considered disabled and when you receive the check. That’s why experts recommend keeping some of your cash in liquid accounts so that you can use it in an emergency.

Tax fact

If you pay your disability insurance premiums, your benefits aren’t taxable income. But if your employer pays your premiums and doesn’t include those premiums in your annual income reported in your W-2, the benefits are taxed.

How disability insurance works for the self-employed?

Suppose you’re self-employed or own your own business. In that case, you can imagine the effect your disability might have on your enterprise, especially if your participation is so vital that day-to-day activities would be disrupted. In addition, unless you have adequate healthcare insurance, your medical costs could be higher. 

If your business isn’t incorporated and you can’t pay your bills, creditors may have the right to repossess your personal property. In short, disability insurance can be essential for the self-employed.

Disability insurance for self-employed works a little differently. Many insurance companies require proof that you’ve owned your own business for two years and will likely ask to see tax returns. Besides the usual income-replacement insurance, you may want to buy business overhead expense insurance to cover your business’s regular operating expenses in case of your disability. That way your company may pay bills and even maintain normal operations while you recover. Keeping it solvent may also make the business more attractive to buyers if you decide to sell.

What Is Disability Insurance And How It Works? by Inna Rosputnia

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