Now that we’ve talked about insurance for your car, your home, your life and your long-term care, it’s time to consider how to protect your paycheck when something bad happens.
Most of us need our paychecks. And most of us, if we ever became ill or injured and couldn’t work, don’t have enough money in an emergency fund to cover our expenses for very long.
That’s where disability insurance comes in.
Before you say you don’t need disability insurance, consider this: A quarter of today’s 20-year-olds will become disabled at some point before they retire, according to the Social Security Administration.
And how about this, from the Council for Disability Awareness:
A 35-year-old woman — 5’4″, 125 pounds, a non-smoker who works an office job with some outdoor physical responsibilities — has a 24% chance of becoming disabled for three months or longer during her working career. There’s a 38% chance the disability would last five years or longer. If the same woman was a smoker and weighed 160 pounds, the risk of a disability that lasts three months or longer goes up to 41%.
And take a 35-year-old man — 5’10″, 170 pounds, a non-smoker who works an office job with some outdoor physical responsibilities. He has a 21% chance of becoming disabled for three months or longer during his working career, and there’s a 38% chance the disability would last five years or longer. As a smoker and at 210 pounds, the chance of a disability that lasts at least three months goes up to 45%.
Convinced yet? Even if you’re not, there are certain things everyone needs to know about disability insurance before choosing a policy:
1. You can’t count on worker’s compensation.
Even though it’s required
in all states, worker’s comp is only helpful in certain situations. According to the National Safety Council, nearly 75% of long-term disabilities are not from a work-related cause. If you do qualify, you’d generally get about two-thirds of your income.
2. Some states have you covered… for a while.
If you live in New York, New Jersey, Rhode Island, California or Hawaii, the state will provide some short-term disability benefits, generally up to six months’ worth. You already pay for this through payroll deduction. If you live in one of the other 45 states, you’re out of luck.
3. There’s Social Security coverage, but it’s not for everyone.
Social Security has a disability insurance program, which on average paid $1,130 per month for beneficiaries in 2012. But the agency says 65% of those who apply are denied, at least upon the initial application.
4. You may already have disability insurance.
Take some time to visit your HR department to find out what coverage your company has. It might be a short-term policy that would cover a percentage of your income for up to three months, or it could be a long-term policy that generally pays between 40-60% of your pre-tax income for a longer time period. The bonus here is that because it’s a group plan, you won’t be denied coverage, and many employers foot the bill.
6. There are other, non-work sources for group policies.
7. Your credit cards may offer disability insurance… but beware.
8. Buying your own policy, while the most expensive option, is also the most flexible.
9. There are two main types of disability coverage.
Items 10 through 15 are terms that anyone looking to buy disability coverage should become familiar with: