Disability Insurance

Disability Insurance pays part of your income if you can't work because of an accident or injury. Your most valuable asset is your ability to earn a living.  Everybody who relies on a paycheck  needs disability insurance.

According to the Social Security Administration, more than one in four 20 year olds will experience a disability for 90 days or more before they reach age 67. Back injuries, cancer, heart attacks, diabetes and other illnesses lead to most disability claims. What would happen to you and your family if you lost your income?  Would replacing a large part of your lost income help?

There are two types of disability insurance: short term and long term. Short term disability insurance usually replaces 60% to 70% of your base salary, pays out for a few months to one year, and may have a short waiting period, called the "elimination period", after you become disabled before the benefits are paid.  Long term disability insurance usually replaces 40% to 60% of your base salary, continues until the disability ends, a certain number of years, or retirement age, A common waiting or elimination period is 90 days after disability before benefits are paid.

Your policy's definition of disability is crucial!  Some disability insurance policies only pay if you can't work at "any occupation".  Others pay if you can't work at your "own occupation". Anyone with valuable skills, including but not limited to a doctor, dentist, or lawyer, should have disability insurance with disability defined as being unable to work in your "own occupation".

You should own your own disability insurance policy. 
Consider buying a policy if you don’t have any or enough disability coverage at work or are self-employed. Employer-sponsored disability insurance usually pays only a portion of your base salary, up to a cap. It’s a good idea to supplement that coverage if your salary far exceeds the cap or you depend on bonuses or commissions.
An insurer will consider other sources of disability insurance to determine how much coverage you can buy. Generally, you can’t replace more than 75% of your income from all the coverage combined.

Buying your own policy lets you:
 
  • Customize the coverage with extra features, such as annual cost-of-living adjustments
  • Choose the insurance company with the best offerings
  • Keep the coverage when you change jobs. Employer-paid coverage ends when you leave the company. (You might be able to take the coverage if you pay the full premium for disability insurance offered through the workplace.)
  • Control the disability insurance. The coverage stays intact as long as you pay for it. But employer-sponsored coverage will end if the employer decides to stop providing disability benefits.
  • Collect benefits tax-free if you become disabled. If the employer pays for the coverage, you must pay taxes on the benefits.