Can a long term disability jeopardize your most valuable asset? Not if you have long term disability insurance. When asked what your most valuable asset is, you might say that it is your home or your retirement plan. But that may not be correct.
For many people, their most valuable asset is the ability to earn an income. Because without this, it would be difficult – if not impossible – to obtain other things.
According to the Council for Disability Awareness, the average worker has a 30% chance of becoming disabled. And, one in eight workers will be disabled for at least five years during their working years.
So, what happens if you become ill or injured and are no longer able to work? How long would you be able to pay your monthly living expenses without an income? You can protect your paycheck with disability insurance coverage.
What does Disability Insurance Cover?
Individual disability insurance can provide you with a percentage of your monthly income if you become injured or sick and you are unable to work and earn an income.
What does disability insurance cover?
Disability insurance will replace some of your income when a disabling condition prevents you from working. This type of insurance will not cover the cost of medical care or long term care services, though.
The dollar amount of benefit that you can receive will be dependent on your current income amount. Most disability plans won’t pay 100% of your income, but rather a percentage of it.
How Does Disability Insurance Work?
Once you qualify, a disability insurance policy can provide you with a regular income for a certain period of time. Benefits will payout after the insured satisfies a waiting period.
Disability insurance plans will often have a maximum coverage limit, too. This means that you can receive benefits until you either exceed the policy’s specified time limit or the maximum coverage amount – whichever occurs first – until you recover.
What are the Different Types of Disability Insurance?
There are different types of disability insurance. These include short- and long-term coverage. The coverage options can differ between short-term and long term disability insurance.
A short term disability policy will provide coverage for a limited amount of time (such as several months or one year), following a waiting period. This waiting period is usually 0 days, up to 14 days.
With a short-term plan, the waiting period will typically only be in the range of 14 days. The coverage with short term disability may only last for up to a year.
Short-term disability insurance will usually pay out benefits for a disabling injury, a lengthy illness, and / or the birth of a child.
On a long-term disability insurance policy, the waiting period may be as long as one year (or in some cases, even longer). The coverage options, however, will also be longer – some covering benefits up to the insured’s age 65.
Long-term disability also provides coverage for illness and / or injury that can prevent the insured from working. It does not, however, cover childbirth.
This type of disability coverage has longer benefit periods and longer waiting periods that short-term disability. For example, the waiting period could be 60 or 90 days or even a year. But the benefits also last longer. Most policies offer coverage for a certain number of years, such as 5 or 10, or will pay out until you reach age 65.
Own occupation vs Any occupation
In addition to short versus long-term disability insurance being different in terms of coverage, there may also be different benefit triggers. An insured won’t qualify for benefits unless they satisfy the policy’s benefit triggers.
One of the primary benefits triggers is whether the policy is “own occupation” or “any occupation”. An own-occupation disability policy will generally require that the insured is unable to perform the “material and substantial” duties of his or her particular occupation.
This means that the insured may not necessarily be fully disabled. Rather, that they are just unable to do the job that they have the training and education for.
Conversely, any occupation policy will require that the insured be unable to engage in any gainful occupation that he or she is reasonably suited for. This benefit trigger is more strict than own occupation.
Disability Insurance Coverage Options
The amount of benefit you receive monthly from your disability insurance policy.
The duration of time that you have to wait before your benefits will start.
The duration of time that you can receive benefits from a disability policy.
A few FAQ
Can the self-employed get disability insurance?
If you are self-employed, you may be able to get disability insurance. However, there are some parameters that you will likely need to meet before you can apply for this type of coverage.
For example, you may have to have been at your current occupation for a certain amount of time, such as two years, so that the insurance company knows the amount of your average monthly income.
Self-employed people face substantial risk if an unexpected illness or injury occurs and deems you unable to work – even for a short period of time. That’s why self-employed persons should highly consider a disability insurance policy.
There are a number of factors that can affect how much disability insurance coverage costs. These include:
- Your age at the time of application
- The amount of monthly income benefit
- Whether or not you choose to include inflation protection
- How long your benefits will be paid out to you
- The waiting period that you select
- The insurance company that you choose
Can you get a temporary SSDI?
Social Security Disability Income, or SSDI, is actually set up to be more of a long-term program for those who suffer injuries and / or illnesses and are no longer able to work. Therefore, there are no short-term SSDI benefits available.
Social Security requires that you have been unable to work and earn an income – or that it is expected that you will be unable to do so – for at least 12 months before you are able to receive a Social Security disability income benefit.
When should you get disability insurance?
Ideally, you should consider signing up for a disability insurance policy sooner rather than later. One reason for this is because you will want to apply for coverage at the youngest age possible, as well as when you are healthy, as these factors can affect whether or not you will qualify for the coverage.
Applying now as versus in the future can also have an impact on your disability insurance premium rate, as younger applicants will typically pay less than older ones – with all other factors being equal. You can learn some advantages and disadvantages here.
Is Disability Income Taxable?
The taxation of disability insurance benefits can differ, based on who pays the premium, and whether the money used for the premium payment has already been taxed. For example, with individual disability insurance, you will usually pay the premium with after-tax dollars. Therefore, the benefits will be tax-free.
Unlike health and long-term care insurance premiums, though, you may not deduct the premium that you pay on your tax return as a medical expense.
If you have a disability insurance plan through your employer, the taxability will depend on whether you or your employer pays the premium. If you pay the full amount of the premium with after-tax funds, then the benefits will be tax-free.
However, if your employer pays for the full amount of the premium – and they do not include the cost of the coverage in your gross income – the disability benefits that you receive will be considered taxable.
If you pay part of the premium and your employer pays another part of it, then your tax liability will be split – based on the percentage of premium that you paid. In this case, if you each pay 50% of the premium, then 50% of the benefits received would be taxable.
Who Pays for Disability Insurance?
There are some employers that may pay for short-term disability coverage. However, in many cases, these benefits could run out. So, it is still important to consider getting a long-term disability insurance policy.
In addition, if your only disability insurance coverage is through your employer, you can run the risk of losing this coverage if you leave your job. And, relying solely on Social Security Disability Insurance, or SSDI could also leave you without income.
This is because SSDI is extremely difficult to qualify for. It requires that you have a disability that renders you fully disabled, and / or a condition that may result in death within one year.
With that in mind, having individual long-term disability insurance coverage is typically the most beneficial.
How Do You Sign Up for Disability Insurance?
Disability insurance coverage can differ somewhat from one insurance carrier to another. So, before you sign up for disability insurance protection, be sure that you compare the plans – and the premiums – from more than just one insurer.
The best way to accomplish this is to work with an independent insurance brokerage that has access to many different insurers. If you’re ready to protect your most valuable asset, we can help. We work with more than 40 of the best insurance carriers in the industry. We can find you the disability insurance coverage that best meets your needs – and your budget.