The word “disability” may conjure images of wheelchairs, hospital beds, and around-the-clock nursing care.
In reality, any illness or injury serious enough to keep you out of work can qualify as a disability. And becoming disabled can wreak havoc on your family’s finances, especially if you can’t work for several months or more.
Disability insurance can help protect you from losing all your regular income if a disability prevented you from working.
Who Needs Disability Insurance?
“Disability insurance” could also be called “income insurance” because that’s what it protects: part of your income in case you become disabled and can’t earn money.
When you work, a lot depends on your income: the utility bills, the mortgage, the groceries, the money you’re saving for retirement, the car insurance, and even your ability to order a pizza or subscribe to Netflix.
Suddenly losing your steady flow of cash may be one of the most stressful changes you could experience in life, yet few Americans carry disability insurance.
Many of us just don’t anticipate getting injured, especially if we work in a relatively safe environment like an office or a shopping mall and don’t participate in dangerous activities like drag racing and skydiving.
But the Social Security Administration estimates one in four Americans entering the workforce this year will miss extended time from work because of a disability during their careers.
If a lot rides on your ability to earn money, you should consider a disability insurance policy.
What About Workers’ Comp or Social Security?
A lot of earners who don’t carry this type of insurance think they’re already protected by their state’s Workers’ Compensation program or the federal Social Security Administration.
These programs can help disabled workers, but only under specific circumstances:
- Workers’ Comp: Workers’ Compensation can help replace some of your income if your disability results from an on-the-job injury. If you developed a health problem or got injured away from work, Workers’ Comp wouldn’t help.
- Social Security: Social Security can pay long-term disability benefits, but qualifying for coverage is rigorous and inefficient. Also, payouts tend to be low, and you have no control over them. For example, in 2017, the average Social Security disability benefit was about $1,100 per month.
- State Laws: Several states require employers to provide short-term disability coverage to their employees. Residents of New York, New Jersey, California, Hawaii, and Rhode Island can benefit from their states’ laws, but these short-term disability payouts usually last 90 days or less.
These resources can help under certain circumstances, but only a dedicated long-term disability insurance policy can be designed specifically to meet your needs.
Also, having your own disability insurance policy means your coverage isn’t connected to your employer. You can move from job to job without losing your protection.
How Disability Insurance Works
The cost and hassle of shopping for disability insurance prevents a lot of people from buying coverage. So let’s spend a few minutes learning how these policies work.
The following key terms should help you understand how to build your coverage. You’ll want enough coverage to meet your needs but not so much coverage you couldn’t afford the premiums:
Short Term vs. Long Term Disability
Disability insurance comes in two forms:
- Short-Term Disability: Can replace part of your income for up to 90 days in most cases. Some policies may extend benefits for up to six months.
- Long-Term Disability: Can replace part of your income for several months, several years, or possibly for the rest of your career.
Both kinds of coverage cost about the same, but you get a lot more for your money with long-term disability benefits since they could compensate you for a much longer period of time.
Also, instead of buying a short-term disability policy, you could save up about three months of living expenses to use in case you can’t work for a couple of months and a way to continue paying the bills.
Your coverage amount will be measured as a percentage of your gross income. A typical policy will replace around 50 to 60 percent of your gross income.
Policies which pay a higher percentage will usually cost more, and you can save money with a policy that would replace a lower percentage of your income.
If you get sick or injured and can’t work, your disability insurance policy wouldn’t begin paying right away. Instead, you’d have to complete a waiting period which insurers call an elimination period.
- Short-term policies typically come with a 2-week elimination period.
- Long-term policies tend to set elimination periods of either 30, 60, 90, 180, or 365 days. Shorter elimination periods come with higher premiums.
We recommend a 90-day elimination period for most clients, especially if they already have enough cash on hand to survive a few months without working or if they have access to a short-term disability plan through their employer.
Whether your policy pays benefits for a year, five years, or for a few decades depends on your benefit period. Going with a shorter benefit period can save you on premiums, but a longer period offers the most protection.
Buying a long-term disability policy that your insurance company can’t cancel provides a much more reliable form of protection. With cancelable policies, your insurer could cancel your coverage as you age and become more likely to get sick or injured.
Own Occupation vs. Any Occupation
Disabilities come in many forms. An injury could prevent you from working in your profession while not preventing you from finding another kind of work.
For example, a plumber with a broken leg probably won’t be able to work as a plumber, but he or she could work behind a desk.
A disability policy covering your own occupation would compensate you even if you could find work in another field. This distinction matters most to people who have specialized training and can earn significantly more in their own occupation compared to other work.
How Much Does Disability Insurance Cost?
The elements of your coverage, as discussed above, will impact your disability insurance premiums, so here’s a quick review before we move on to other cost factors:
- Coverage Amount: Buying coverage on a bigger percentage of your income will cost more.
- Elimination Period: A shorter period before benefits kick in will cost more.
- Benefit Period: A policy paying benefits for a longer period of time will cost more.
- Non-Cancelable: A policy your insurer can’t decide to cancel will cost more.
- Own Occupation: A policy covering your disability even if you could find work outside your profession will cost more.
- Policy Extras: You can add on features such as cost-of-living increases, but they’ll also add to the cost of your premiums.
Other Cost Factors for Disability Insurance Premiums
For the most part, you can control the policy-specific factors we’ve discussed as you build your disability coverage. Doing so can help you access more affordable coverage, too.
However, you’ll also come across factors you can’t control, or can’t control as easily:
- Your Age: Statistics show older people will be more likely to become disabled. As a result, older people tend to pay more for disability insurance.
- Your Health: Someone in perfect health is less likely to file a claim for disability benefits. If you’re healthy, you can pay less in premiums.
- Your Gender: Statistics also show men file fewer claims than women for disability coverage. As a result, insurers charge higher premiums to cover women.
- Tobacco Status: Smokers get sick more often and tend to pay higher premiums for disability insurance.
- Your Income: Getting covered for 60 percent of a $150,000 annual salary will cost more than coverage for 60 percent of a $50,000 annual salary.
- Your Occupation: People in more dangerous occupations such as mining and roofing can expect to pay higher premiums for their coverage because they’re more likely to need the coverage.
- Pre-Existing Conditions: If you already have a health condition that could result in a disability claim, expect to pay more.
Putting It All Together With An Estimate
All these factors — policy-specific choices and applicant-specific issues — will work together to determine your premium.
Generally speaking, most people pay somewhere between 1 and 3 percent of their annual salary in premiums for disability insurance coverage.
A young applicant in great health who opts for simple coverage would pay a premium closer to 1 percent. Someone who is older who wants more elaborate coverage may pay a premium around 3 percent of his or her annual salary.
To keep things simple, let’s balance things out and look at someone who is 45 years old who wants to cover 60 percent of an annual salary of $100,000 for five years.
An average applicant fitting this description may find coverage at 2 percent. This would equal $2,000, which divided by 12 would equal about $166 a month.
Where to Buy Disability Insurance
Short-term disability doesn’t make much sense unless your employer provides it as a benefit. You can save thousands of dollars a year by keeping a few months’ salary in savings.
It’s much harder to prepare for a longer period of being out of work, which makes long-term disability insurance premiums much more cost effective.
As you shop for coverage, we recommend these companies:
- The Standard: One of the most versatile and customer-focused companies offering disability insurance policies. If you’d like to build protection based on your specific needs, you’ll find a lot of options here.:
- Mutual of Omaha: Mutual of Omaha also offers flexible options you can use to build protection against losing all your income. You could even buy a policy to pay benefits until you reach age 67.
- Aflac: Aflac can claim about 4.5 percent of the insurance marketplace for a reason: The company’s customers keep coming back. Disability policies are right in Aflac’s wheelhouse.
- Guardian: Guardian Life offers another stable option for disability insurance, and you can add extra protection specifically to cover outstanding loan balances such as mortgages and student loans.
- American Fidelity: This company specializes in disability coverage. If you receive benefits you can get directly deposited payouts, and the company’s customer service staff may be able to help you claim Social Security benefits, too.
How to Choose a Good Company
This isn’t an all-inclusive list. If you have another company in mind, make sure you’ve:
- Checked the company’s ratings: A.M. Best, Moody’s, and Standard & Poor’s rate the financial health of insurance companies. The highest grades (A++, AAA, etc.) mean you’re getting top-notch coverage.
- Explored the company’s options: You’ll want a company with plenty of options for coverage so you can build a policy which meets your specific needs.
- Read some reviews: Online customer reviews tend to be negative on balance, but if you notice a trend reappearing in many different reviews, you may have found an issue worth noting. Check TrustPilot, Consumer’s Advocate, and even Facebook for comments from current and previous customers.
Bottom Line: Disability Insurance Protects Your Income
Health insurance should protect you from out-of-control medical bills, and life insurance could help your family recover financially if you died unexpectedly.
But neither of these policies could remove the stress of earning an income when you’re recovering from a long-term illness or injury.
Long-term disability insurance can fill this gap. Finding the right balance in your policy options can help you save on premiums while still having robust coverage in case you need it.