Buying insurance to protect your home, car, and health is a no-brainer. But what about getting coverage that protects your earning capacity? after all, that’s what allows you to pay for all of the above and much more.
To protect against the risk of losing your paycheck due to injury or illness, there is disability insurance. In this ultimate guide for 2022, we cover everything you need to know about the purpose and importance of disability insurance, including key elements of coverage, answers to frequently asked questions, and more.
let’s get started.
- a simple definition of disability insurance
- How do the key elements of disability insurance work?
- What does disability insurance cover? and does not cover?
- how to get disability insurance coverage in 2022
- what to expect during the di subscription process
- the 4 most important types of disability insurance
- So who needs disability insurance anyway?
- Is it worth getting disability insurance?
- how much you will pay in premium. just like any other type of insurance, this is the payment you must make each month to keep your coverage in force.
- how the policy defines disability. some policies will pay a monthly benefit if an injury prevents you from working at your normal job, but allows you to do other types of work that will nonetheless reduce your income . other policies will not pay benefits if you can work in another type of profession, even if you earn less money.
- How much you will receive in benefits. In most cases, your benefit amount will be a percentage of your income. policies generally pay 60 to 80 percent of what you were earning before your disability.
- how long your benefits will last. the benefit period can be a certain number of months or years, or up to a certain age.
- heart disease
Defining disability insurance is simple: it’s protection for your income.
This type of policy agrees to replace a portion of your income if a disabling injury or illness prevents you from working in a covered occupation. think of it as a hedge for your greatest asset: your ability to work and earn a living.
Having disability insurance provides financial security for you and your loved ones who may depend on your ability to earn a paycheck. The disability insurance benefits you receive from your policy can be used however you want, from monthly bills and out-of-pocket medical expenses to child care and groceries.
You may also hear disability insurance referred to as disability income insurance, income protection insurance, or di.
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Disability insurance is an agreement between insurance companies and the insured. In exchange for the monthly payments you make, the insurance company agrees to pay you a monthly benefit amount if you experience a disability that affects your ability to work.
Disability insurance is designed to replace a percentage of the income you lose due to your inability to earn a paycheck. Having disability insurance means being able to meet your financial obligations (pay bills, cover household expenses, support your family) while you can’t work.
a di policy will detail the key elements of the coverage it provides, including:
With this in mind, let’s take a closer look at the types of conditions covered by disability insurance.
Disability insurance covers injuries and illnesses that limit your ability to do what is expected of you at work. It seems pretty simple, right? well, there are still a lot of misconceptions about what is considered a disability and what is not.
For example, what comes to mind when you hear the word “disability”? many times its freak accidents and rare birth defects. all those tragic and unlikely events that we think just can’t happen to us.
but this is simply not reality.
More than 25 percent of today’s 20-year-olds will experience a disabling event that prevents them from working for at least three months before retirement. And when you consider the most common causes of long-term disabilities, it really isn’t all that surprising. see for yourself here:
You read correctly. 90% of claims filed for long-term disability benefits are from medical illnesses, not physical injuries.
To be clear, this does not mean that injuries such as fractures, sprains, and muscle and ligament strains are not disabling. however, what it does mean is that the scope of disabilities that can prevent you from earning an income is much broader than most people realize.
When you purchase disability income insurance, any coverage you ultimately receive will come from an insurance company. but there are several different sources you can use to get coverage.
One option is to seek coverage as an individual. Disability insurance for individuals can be obtained by working with a licensed independent insurance agent or by going directly to an insurance company. When you buy an individual policy, you own it as long as you pay the premium. In addition, the amount you pay is generally fixed. it won’t change unless you opt for more coverage. individual plans are also portable. you don’t lose coverage because you change jobs or lose your job.
Another option is to get disability insurance through work. Often, group disability insurance coverage can only be obtained if it is offered to you by your employer or an association to which you belong. Because many employers offer group disability insurance as an employee benefit, they may pay some or all of the cost of the premium. group disability plans are guaranteed issue. This means that if you apply for coverage, you are automatically enrolled. no subscription.
The biggest drawback to an employer-sponsored policy is that it’s possible to lose coverage. this can happen in two ways.
- First, you will lose your disability insurance if you no longer work for the employer sponsoring the group plan. this type of coverage depends on your employment.
- Second, companies renew their benefits annually, including group disability insurance. after these reviews, there is no guarantee that the plan will be renewed. employers can simply decide not to continue offering disability insurance.
While participating in group disability insurance through work is easier and cheaper, individual coverage is stronger and more reliable. That’s why buying an individual plan is often the recommended route, even if you already have group coverage.
Your risk of becoming disabled plays an important role in determining how much you’ll pay for coverage. So how exactly do insurance companies calculate your risk of becoming disabled?
individual disability income insurance requires underwriting. While group plans help insurers spread their risk across a large group of policyholders, issuing an individual policy requires insurance companies to assess the risk of a single applicant.
Before you get caught up in cost, it helps to understand the various factors insurance companies consider when evaluating risk.
1. your age
The older you get, the more likely you are to become disabled. Naturally, the cost of disability insurance increases with age. That’s why purchasing disability insurance is a smart investment for healthy young professionals.
2. your sex
All things being equal, women can pay up to 40 percent higher premiums for disability insurance. That’s because they file more claims than men and for longer periods of time. (For what it’s worth, men get to keep the short end of the stick when they pay for life insurance.)
3. your health history
Your current health status may herald your risk of future disability. insurers will take into account:
- past or current tobacco use
- chronic conditions
- family medical history
- your current height and weight
- blood and urine test results
- must have worked in jobs covered by social security.
- must have worked long enough and recently under social security.
- You must have a medical condition that meets the Social Security definition of disability.
- You must be unable to work for a year or more due to a disability.
- You must have a condition that significantly limits your ability to perform basic activities, such as lifting, standing, walking, sitting, and remembering.
- new jersey
- new york
- rhode island
- What happens if you experience a temporary or permanent disability at some point in your working life? (one in four will).
- How long could you go without a paycheck before experiencing financial hardship? (70% of Americans couldn’t last a month.)
- Does your group plan provide enough coverage to maintain your current lifestyle?
- Could you get by on government disability benefits? if it’s actually approved, that is.
once again, the younger and healthier you are, the better off you will be when it comes to shopping.
4. your job occupation
Insurers consider your job when assessing your disability risk. this is done for two reasons.
First, some jobs are more susceptible to injury or illness than others. Police officers, firefighters, construction workers, and manufacturing workers are more likely to be injured on the job than, say, the typical office worker.
Second, insurers also assess how specialized a job is. The more difficult it is to perform a job with certain injuries or illnesses, the more the insurance company will have to pay in benefits. for example, an office worker confined to a wheelchair may return to her regular job at some point. the same cannot be said for a mechanic or a plumber.
Insurance companies classify jobs based on the hazards of the job and the difficulty of returning to work. These occupation classes are based on the duties of a job, not the job title. if an individual has multiple or part-time occupations, the occupation classification will be determined by the occupation with the highest risk.
5. your annual income
Disability insurance benefits are based on a percentage of your income. the more you earn, the more benefits you can collect if you become disabled. As a result, people with high incomes present a greater financial risk to the insurance company.
6. your location
Where you live can also affect your risk of disability. insurance companies consider the regulations, claims history, and costs of living in your state of residence.
More information: How much does disability insurance cost?
So far, we’ve discussed what disability insurance is, how it works, and where you can get it. But what are the different types of disability insurance coverage that are actually available to you?
While there are several types of policies and sources of coverage, let’s narrow our discussion down to the four most important ones you should know about.
1. long-term disability insurance
Long-term disability coverage protects the income of people affected by disabilities for an extended period of time. covers serious injuries and illnesses that limit or prevent a person from working for several months or years, even permanently.
Benefits end once you have recovered from a disability up to a maximum benefit period. this period can be a set number of years, such as 10 years. You can also buy policies that will pay up to age 65.
You can buy long-term disability insurance through a group plan or by getting your own individual policy. it is more expensive than short-term disability, but offers much better protection.
Long-term disability policies typically replace 60 to 80 percent of your income. many policies even replace lost income if you have to take a low-paying job due to injury or illness.
2. short-term disability insurance
On the other hand, short-term disability plans pay benefits for those who experience temporary injuries and ailments. usually provided through an employer group plan.
Although you can purchase an individual short-term disability insurance policy through some companies, many financial experts advise against it. That’s because the cost of the premiums may not justify the amount you would receive in benefits. If you can’t get free short-term coverage from your employer, you should set up an emergency fund.
Short-term disability insurance will generally replace 40 to 60 percent of your pre-disability earnings. benefits generally last three to six months. some policies can pay up to two years. benefits generally begin 14 days after the disability occurs.
3. social security disability insurance (ssdi)
ssdi is a government program administered by the social security administration. Like the other types of coverage discussed above, SSDI pays benefits in the event a disability prevents you from working.
however, ssdi benefits are the most difficult to qualify for. qualifications include:
Generally, you will not be considered disabled if you work and earn more than $1,220 per month. If you are not working, Social Security will consider whether you can work. If you can, even if it is not the type of job you had before your injury or illness, you will not qualify for SSDI benefits. Social Security will base this decision on your medical condition, age, education, previous work experience, and transferable skills.
According to the Social Security Administration, only 34% of SSDI applicants had their applications approved between 2006 and 2015. Even if you qualify for SSDI, the benefits are likely to replace only a small fraction of your income. the average monthly disability benefit in 2019 is $1,234.
more information: social security disability insurance
4. state disability insurance
You may also be covered by state disability insurance if you live and work in one of these five states:
These five states legally require employers to offer disability insurance coverage to employees for injuries and illnesses that occur outside of the workplace.
Like SSDI, state disability insurance has a number of shortcomings that make it an unreliable coverage option.
more information: state disability insurance
Set the record straight on workers’ compensation
Technically, workers’ compensation is not a type of disability insurance. It is an accident insurance that is paid by employers. but because it’s so commonly confused with disability insurance, we make sure to set the record straight whenever we can.
Under workers’ compensation insurance, you may receive benefits to cover medical bills or rehabilitation costs if you are injured or become ill on the job. Workers’ compensation covers partial loss of wages if you miss work. some policies will provide death benefits if you die on the job.
Unlike the other types of coverage we’ve discussed so far, workers’ compensation only applies if you get sick or injured while performing your job duties. According to the Bureau of Labor Statistics, only 1 percent of American workers missed work due to an occupational injury or illness last year. That said, you shouldn’t rely solely on workers’ compensation to protect your income.
more information: workers’ compensation vs. disability insurance
Wondering if you should get disability insurance, but not sure if you really need it?
Well, if you depend on your source of income, chances are good that you need disability insurance, especially if you have loved ones who depend on you.
Disability income insurance is a smart investment for young, healthy people who want to secure their financial future. Without disability insurance, a serious accident, vision loss, chronic condition, or illness could cause financial hardship. even a temporary disability can cause you to deplete your savings, fall behind on bills, and rack up debt.
For example, consider what would happen if you had a heart attack. because it did not happen as a result of your job, you would not be able to collect workers’ compensation. You also wouldn’t qualify for government disability benefits. that means that without disability insurance, you would not have an active source of income while you recover. the same would be true if you were injured in an accident.
Disability insurance is for the mechanic who is unable to repair cars for a few months due to a broken hand. can provide income for pilots and truckers who suffer from vision problems. helps architects, accountants and lawyers who are unable to work after suffering traumatic brain injuries. provides financial security for small business owners and other self-employed professionals who can’t afford a comfortable company employee benefits package.
disability insurance is for everyday people like you and me.
You’ve decided it’s time. you need to purchase disability insurance.
but the cost is still hard to justify for some. after all, you’re about to buy something you hope you’ll never have to use. So is it really worth it?
If you find yourself in this situation, the easiest way to understand the value of disability insurance is to consider what you would do if you were unable to work for an extended period of time.
Of course, there is no way to answer any of these questions with certainty. But you can prepare for the worst by setting up a disability insurance plan today.
When you buy disability insurance, what you’re really buying is peace of mind for you and your family’s future. because it’s always better to be proactive now than reactive when it’s too late.
The information and content provided in this document is for educational purposes only and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. brisa does not guarantee the accuracy, completeness, reliability, or usefulness of any testimonials, opinions, advice, product or service offerings, or other information provided here by third parties. individuals are encouraged to seek the advice of their own tax or legal advisor.