By Hanna Horvath, Insider
Insurance is a great risk management tool to financially protect yourself against unexpected events. But when most people think about financial risk, they think about a house fire or car crash. Few people think about losing one of their most valuable assets — their income.
As a financial planner, I see many people go without disability insurance because they think they don’t need it. But that couldn’t be further from the truth.
One in four adults will be out of work for at least a year due to a disability. Very few people have enough savings to cover a year in lost income — in fact, three in 10 American adults are unable to cover a $400 emergency. Disability insurance can take the sting out of these situations.
Disability insurance is for everyone
Disability insurance is not just for workers in high-risk jobs; most injuries and illnesses happen outside of work. The most common disability insurance claims are for work-induced musculoskeletal disorders, like back pain or tendinitis, cancer, pregnancy, and mental-health issues.
If you’re the breadwinner, you need disability insurance to protect your income for not just you, but your loved ones who rely on you. The same goes for those paying off debt — if you find yourself out of work, you’ll still need to be making monthly debt payments.
There are two types of disability insurance: long-term and short-term. Like the names suggest, short-term disability covers you for a shorter amount of time, typically under three months, while long-term disability insurance can cover your lost income for years, depending on the policy you have.
Other types of coverage often aren’t enough
Many people have short-term disability insurance through their employer, but that only covers you for a short amount of time. What’s more, the benefits typically only cover a portion of your salary and are taxable because your employer is paying the premium.
Unless you get injured on the job or your injury was directly related to work, workers’ compensation will typically not cover your injury or illness.
Social Security does offer some disability insurance coverage, but the application process is often very time consuming and has a 70% denial rate, and likely won’t cover your entire income. You may not have the time and savings to wait for your claim to go through after you get injured or sick. What’s more, the average monthly Social Security disability income benefit was $1,279 a month, which may not be enough to cover your lost income.
Purchasing a long-term disability insurance policy can help cover some of these gaps, and provide tax-free income if the unexpected happens.
Disability insurance isn’t as expensive as you think
The average cost of a long-term disability insurance policy is 1% to 3% your annual salary, though costs will vary.
Your job, salary, and level of health are some of the factors that determine how much your policy premiums will cost. The type of policy also affects the cost — whether it’s an any-occupation or own-occupation policy.
Any-occupation disability insurance will cover you if you’re unable to generally work in your line of work, and own-occupation covers you if you’re unable to perform your specific job. Own-occupation policies cover your income better, but are often more expensive.
How to decide on a disability insurance plan
When considering how much disability insurance to get (or if you even need it), think about your job, how much you make, and who would cover your bills if you were to become sick or injured.
Short-term policies last a maximum 26 weeks and cover around 40-60% of your income. Long-term policies can last the rest of your life and typically replace 40%-60% of your income. You should take a closer look at your current financial situation to decide how much coverage you need.
Even if your employer offers disability insurance (and especially if they don’t) you should purchase an individual plan. It will travel with you if you leave your job, so you’ll always be covered.
One strategy I personally use and recommend is laddering your disability insurance policies, which basically involves holding both long-term and short-term disability insurance policies. Short-term disability policies have a short elimination period before paying out benefits, while long-term disability insurance policies have longer waiting periods, typically around 90 days. Laddering your policies ensures you start getting paid right after an illness or injury.
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