According to the Council for Disability Awareness, about two-thirds of working Americans don’t have private disability insurance. A troubling statistic, when you consider that a 20-year-old today has a one-in-four chance of becoming disabled, before age 67.1
Disability insurance helps to replace some of your lost income if you become unable to work due to a qualifying illness or disability. It can help provide peace of mind to anyone who would be drastically affected by the sudden loss of a paycheck—whether employed part-time or full-time. Stay-at-home parents may want to consider disability insurance to help cover the cost of childcare, in the event that they become unable to care for their children themselves and don’t have family or others to help assist them.
So who doesn’t need disability insurance? If you can afford to self-insure, that is to live comfortably without a paycheck or if your spouse is a high earner and you can comfortably live off his or her paycheck, then it may be cheaper to do that than to purchase disability insurance. Retirees, since they are no longer working for a living, and active duty military personnel (who are generally covered under Social Security) are generally not eligible for disability insurance.
How to get coverage. Most individuals get disability insurance through their employer. Historically, employers tended to pay the full cost of premiums, or at least for coverage up to a certain level, with employees automatically enrolled. In recent years, it has become common for employers to offer coverage only as a voluntary benefit, with the employee covering most or all of the cost. Bear in mind that most group insurance offered by employers has a much narrower definition of disability than can be obtained through private insurance. If your employer-provided disability insurance doesn’t provide adequate coverage to meet your needs, your employer plan may make additional coverage available. (See below for ideas on how much insurance you may need.) If it doesn’t, you can always obtain supplemental insurance elsewhere.
Short term or long term? If you decide that disability insurance is right for you, you may also want to consider purchasing both long-term and short-term disability insurance policies. Short-term policies are designed to replace a portion of your income for the first few weeks or months of a disability, and are generally only available through your employer. Long-term insurance kicks in after short-term coverage ends, and lasts longer—how long depends upon your policy’s terms. Long-term insurance is typically more expensive than short-term, and costs vary depending on factors including age, income when benefits begin following a qualifying disability, and the percentage of income you’d like to replace.
Not all policies are created equal. When shopping for a policy, keep in mind that contractual provisions generally govern the price, so your focus should be on those provisions. Make sure you truly understand the policy’s definition of disabled, as it will vary from one policy to the next. For example, one policy may deem you disabled if you can’t perform your particular job, while another may require that you must be unable to perform any job. Be clear about how long the policy can last—will it last through your disability or only for a set number of years? One popular choice is a policy that covers the full duration of your disability, or at least until you can begin using retirement benefits. Determine how much of your income you’ll need to replace. While there are many disability calculators available online, you can generally assess your insurance needs by starting with your current monthly living expenses, then subtracting out any expenses you may be able to save if you were no longer working (for example parking or commuting expenses), and finally, reducing that amount by any other possible income sources (such as income from savings, investments or rental properties).
Take note of how your benefits are taxed: If you are paying for your own premiums with after-tax dollars, benefits will not be subject to income tax when they are distributed to you. If your premiums are paid with pretax dollars, benefits will most likely be taxed at distribution.
If you decide to purchase disability insurance, you should consider continuing coverage as long as you need it—that is, for as long as a disability would leave you without needed income. You work hard to earn that paycheck, so give it—and yourself—a well-deserved safety net.
1 Council for Disability Awareness, Disability Insurance Awareness Month 2016 Campaign Fact Sheet, http://www.disabilitycanhappen.org/diam/cdamember/2016/diam2016_factsheet_general.pdf, May 2016