Now that we’ve talked about insurance for your car, your home, your life and your long-term care, it’s time to consider how to protect your paycheck when something bad happens.
Most of us need our paychecks. And most of us, if we ever became ill or injured and couldn’t work, don’t have enough money in an emergency fund to cover our expenses for very long.
That’s where disability insurance comes in.
Before you say you don’t need disability insurance, consider this: A quarter of today’s 20-year-olds will become disabled at some point before they retire, according to the Social Security Administration.
And how about this, from the Council for Disability Awareness:
A 35-year-old woman — 5’4″, 125 pounds, a non-smoker who works an office job with some outdoor physical responsibilities — has a 24% chance of becoming disabled for three months or longer during her working career. There’s a 38% chance the disability would last five years or longer. If the same woman was a smoker and weighed 160 pounds, the risk of a disability that lasts three months or longer goes up to 41%.
And take a 35-year-old man — 5’10″, 170 pounds, a non-smoker who works an office job with some outdoor physical responsibilities. He has a 21% chance of becoming disabled for three months or longer during his working career, and there’s a 38% chance the disability would last five years or longer. As a smoker and at 210 pounds, the chance of a disability that lasts at least three months goes up to 45%.
Convinced yet? Even if you’re not, there are certain things everyone needs to know about disability insurance before choosing a policy:
1. You can’t count on worker’s compensation.
Even though it’s required in all states, worker’s comp is only helpful in certain situations. According to the National Safety Council, nearly 75% of long-term disabilities are not from a work-related cause. If you do qualify, you’d generally get about two-thirds of your income.
2. Some states have you covered… for a while.
If you live in New York, New Jersey, Rhode Island, California or Hawaii, the state will provide some short-term disability benefits, generally up to six months’ worth. You already pay for this through payroll deduction. If you live in one of the other 45 states, you’re out of luck.
3. There’s Social Security coverage, but it’s not for everyone.
Social Security has a disability insurance program, which on average paid $1,130 per month for beneficiaries in 2012. But the agency says 65% of those who apply are denied, at least upon the initial application.
4. You may already have disability insurance.
Take some time to visit your HR department to find out what coverage your company has. It might be a short-term policy that would cover a percentage of your income for up to three months, or it could be a long-term policy that generally pays between 40-60% of your pre-tax income for a longer time period. The bonus here is that because it’s a group plan, you won’t be denied coverage, and many employers foot the bill.
5. Your employer may also offer additional coverage that you’d pay for.
If your boss offers a policy, check it out because it’s probably less expensive than one you’d buy on your own. The negative is that if you leave or lose your job, you lose your coverage.
6. There are other, non-work sources for group policies.
If you belong to a professional organization or an alumni group, you may be eligible for coverage, and policies are probably cheaper than individual ones.
7. Your credit cards may offer disability insurance… but beware.
If your card issuer offers disability coverage, the initial premiums will seem super-cheap compared to individual policies. But you’ll also find the benefits are limited, and may only pay enough to pay off your credit card balance. Don’t bother.
8. Buying your own policy, while the most expensive option, is also the most flexible.
Unlike employer policies, the insurance will stay with you as long as you pay the premiums. Most plans will cover 40 to 65% of your income, and if you pay the premiums with after-tax dollars, the payouts when you’re disabled are tax-free.
9. There are two main types of disability coverage.
“Own occupation” pays if you’re unable to work at your own occupation, while “any occupation” will cover you if you’re unable to work at all. This is an important difference. Say you’re a waiter and you lose your leg in an accident. You can’t easily be a waiter — your own occupation — but you could take a desk job somewhere. If the waiter had “any occupation” coverage, the policy wouldn’t pay. If he had the “own occupation” policy, it would pay. Of course the “own occupation” coverage is more costly.
Items 10 through 15 are terms that anyone looking to buy disability coverage should become familiar with:
10. “Benefit level”/”Benefit period”
The benefit level is how much of your pre-disability income the policy will pay. Generally this will be from 40 to 65% of your income. The benefit period is how long the policy will pay out to you. Typically, you can choose between one and five years, or for a more expensive premium, until age 65.
11. “Elimination period”/”Waiting period”
This is how long you have to wait after a disability happens before the policy starts paying benefits, usually between 30 and 90 days. If you want a lower premium (and you have a healthy emergency fund to get you through), consider a 180-day elimination period.
12. “Guaranteed renewable”/”Non-cancelable”
It may cost more, but you want a policy that’s both guaranteed renewable and non-cancelable. That means they can’t cancel your policy as long as you pay the premiums, and the premiums will not change. If your policy is only guaranteed renewable, the policy can’t be cancelled, but premiums can be raised if your state approves a rate hike for all policies of your type.
13. “Inflation protection”
This will also cost more, but it’s a very important addition to any disability policy, which you’re likely to have as long as you’re working. The inflation clause, or rider, is basically a cost-of-living adjustment so you if you collect, your benefits will rise as costs rise.
14. “Presumptive disability”
This means you are presumed completely disabled — even if you can perform certain tasks, and even if you can do your regular job — if you suffer certain conditions, such as the loss of a limb, hearing, eyesight or speech.
Make sure you understand any exclusions or limits. You might find disabilities caused by pre-existing conditions could be excluded, as could mental illness or stress-related disabilities, and chronic conditions such as fibromyalgia. Also look for exclusions related to disabilities caused by so-called dangerous hobbies.
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You can read Karin Price Mueller’s stories for The Star-Ledger at NJ.com, follow her on Facebook, and on Twitter @kpmueller.
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