Disability Insurance 101: Tips To Get You On The Right Track
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50 percent of working Americans couldn’t make it a month without their income before financial difficulties would kick in. Could you?
“You have a greater likelihood of becoming disabled than you do of dying before you retire, and yet more people understand the need for life insurance.”
Why do many Americans skip disability insurance?
“It won’t happen to me.”
Just over one in four of today’s 20 year-olds will become disabled before they retire. Furthermore, accidents are typically not the cause of disability; nearly 90 percent of disabilities are caused by cancer, heart disease, musculoskeletal disorders and other illnesses.
“My work will cover me.”
According to the Bureau of Labor Statistics, 42 percent of private industry workers had access to short-term disability insurance plans and 34 percent to long-term disability coverage in 2018. Meanwhile, 26 percent of state and local government workers had access to short-term disability insurance and 38 percent to long-term disability benefits.
As of 2017, only California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico have mandated short-term disability coverage to be provided to workers either directly or through employers.
What are your options?
1. Short term disability insurance
- Designed to replace a percentage of your gross income for a short amount of time – may range from 60 to 180 days, depending on your policy
- You need to wait for an “elimination period” before the coverage kicks in – the actual time period can vary depending on the policy
- Employers often offer short-term disability insurance to their employees, and many subsidize that coverage – if they do, the benefits are taxable
2. Long term disability insurance
What happens if your short-term disability coverage runs out and you’re still out of work? Long-term disability kicks in after you’ve been out of work for an extended period of time, such as 180 days.
- Can be acquired through a private insurance company or through a company-sponsored plan
- Long term disability insurance policies will typically pay between 40 to 60 percent of your pre-disability salary
- These benefits are paid for a specific period of years or until age 65 – every policy is different, so pay attention to the fine print
- There is an elimination period following the onset of disability to qualify for benefits – this can vary, but averages 180 days
Group vs. individual disability insurance policies
Group disability policies
- Most people have a group LTD insurance policy – one they got through their employer or through a professional organization/association they’re part of
- Employer may pay the premiums or at least a portion of the premiums
- Income replacement benefits paid under a group policy are taxable
- More limitations than individual policies – limitations on duration of coverage, conditions that are covered, etc.
Individual disability policies
- Can be purchased through private disability insurance companies
- More customizable than your typical group LTD plan
- They’re portable – your policy will go with you if you leave your job
- These policies have less limitations than group policies
- Will require a medical exam when applying
- Benefits are received income tax-free
Do you have questions about your disability insurance policy?
DarrasLaw offers free consultations on individual and group long-term disability insurance matters, including free policy analysis.