Disability insurance replaces part of your income if you’re unable to work.

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. But what happens to your goals and even to your day-to-day financial security if you’re disabled and unable to work?

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, which replaces part of your income while you’re unable to work.

Your employer may offer disability insurance at a low group rate or at 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 plan at work, or if your employer’s disability policy won’t cover a large enough percentage of your total expenses, you may want to consider an individual policy.

How benefits work?

Most disability policies pay a percentage of your monthly salary, usually between 50% and 70%, up to a cap, or limit. 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.

Disability policies also offer varying periods of coverage. 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. Such added benefits usually increase the cost of the premiums.

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

What’s a disability?

Insurers and the government are strict about what constitutes disability. 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.

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One type of disability policy called own-occupation or own-occ will pay benefits to you if your condition prevents you from doing your own skilled work. So, if you’re a doctor, you can start receiving benefits if you’re unable to practice medicine, even if you’re able to 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.

If you’re considering any policy, read it carefully to find out what it does and does not cover. Many policies exclude disabilities that are the result of drug abuse, attempted suicide, or criminal actions on your part, and some may refuse to cover disabilities that result from a pre-existing condition.

Disability Insurance

While you wait

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 longer the waiting period, also known as the elimination period, the lower the cost of insurance. 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 you can use it in an emergency.

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.

If you’re self-employed

If you’re self-employed or own your own business, 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. Unless you have adequate healthcare insurance, your medical costs could be higher too.

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 especially important for the self-employed.

Besides the usual income-replacement insurance, you may want to buy business overhead expense insurance to cover your business’s normal operating expenses in case of your disability. That way your business may pay bills and even maintain normal operations while you recover. By keeping it solvent, you may also make the business more attractive to buyers if you decide to sell.

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.

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

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