What You Need to Know About Disability Insurance

Long-term ailments are a bigger possibility than you might think

From the moment they know a child’s on the way, a lot of parents scramble to take out life insurance that will protect their family should the unthinkable happen. But that other way of safeguarding your paycheck — disability insurance? It tends to be an afterthought.

The fact is, the chances of somebody young experiencing a job-impeding injury or illness is a lot higher than their risk of dying before retirement age. In fact, according to an analysis last year by the Social Security Administration, the average 20-year-old male has a 26 percent chance of experiencing a disability before the age of 65.

Because the report has a fairly high threshold for what it considers a “disability” — a physical or mental impairment lasting at least a year — you can argue the likelihood is actually even higher. That same person’s probability of passing away without ever needing disability coverage: 7.4 percent.

So perhaps it’s time to shake off the perception that disability policies are only for older people or those who work in dangerous careers. In reality, anybody whose family depends on their income should really have coverage.

What to Know About Group Disability Insurance Plans

Only 34 percent of Americans receive disability coverage through their employer, according to a 2017 survey by Harris Poll. But even when it’s not offered free of charge, some employers provide policies that you can buy into – and they’re usually cheaper than the ones you’d find on the individual market.

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That said, group policies have certain drawbacks, too. For one, they often don’t provide the level of protection that breadwinners truly need. Insurance should ideally replace at least half their income, enough to ward off a financial nightmare if they suffer a protracted illness.

However, some workplace policies reimburse employees for less than that. And they often come with annual cap on benefits — typically $20,000 or less per year — so they may not provide much of a safety net for those with longer-lasting ailments.

What’s more, group plans tend to define disabilities more narrowly than private ones. To receive benefits, you may have to be completely unable to work in any occupation. Private plans are more likely to offer coverage if you can no longer perform your current line of work — what’s known as “own occupation” coverage — even if you can still perform another job.

So it’s best to think of workplace policies as a good place to start, even if you end up needing to get supplement coverage on your own.  It’s worth checking with your human resources department to see if they offer coverage. A lot of times, those benefits get missed when people start a job. If so, you’ll want to note on your calendar when the next open enrollment period starts so you can take advantage.

What to Know About Individual Market Disability Insurance

For those who don’t get coverage at work, or need additional coverage, there are a wide range of companies that offer policies on the individual market. Most plans will cost anywhere from 1-3% of your average salary, according to the online brokerage Policygenius. So someone earning $100,000 a year would typically pay anywhere from $83 to $250 a month in premiums.

The ultimate price tag depends on a range of factors, including your age, occupation, and health. But it also varies based on how you configure your policy. Like healthcare coverage, disability plans come in all sorts of shapes and sizes. The biggest variables include:

  • Amount of coverage. This is the percent of your income that the policy will replace. Remember that private policies are paid with after-tax dollars, so unlike group plans, the benefits aren’t taxed. That means a policy that reimburses, say, 60% of your salary may actually cover nearly all your take-home pay.
  • Elimination period. After you become disabled, you typically have to wait for a certain length of time before you start getting benefits. As long as you have a health emergency fund built up, consider extending the trigger period to 90 days or more. You’ll save a lot on your premiums if you do.
  • Benefit period. Once benefits kick in, they may last for two years, 10 years or until you retire. While shorter windows are certainly cheaper, they’re not always the best deal. According to The Council for Disability Awareness, the average long-term disability claim lasts 34.6 months. Consider getting coverage that lasts at least that long.

Ideally, you’ll end up with a policy that replaces virtually all your income if you need to file a claim. But don’t worry if a more robust plan is out of your budget. In reality, some coverage is a whole lot better than no coverage at all.

As with any important financial decision, it pays to shop around a bit. You can either get quotes directly through insurers or talk to a broker, who can compare multiple providers for you. Either way, make sure you go with a company that has a solid financial rating from A.M. Best, so you know they’ll be there if and when you need them.