Private Disability Insurance
Everyone has some risk of becoming disabled. As a worker, there’s also a risk you’ll lose your ability to earn a paycheck because of a disability. If you depend on a paycheck, it makes sense to protect it with private disability insurance. Some states have state-mandated disability insurance programs. If you live in California, Hawaii, New Jersey, New York, or Rhode Island, you should have access to the state’s disability program. However, these programs have limited eligibility, benefit amounts, and benefit periods.
For example, the disability program in California only provides benefits for a maximum of 52 weeks and the benefits only replace 60% of income for higher-income earners. In New York, you can receive benefits for a maximum of 26 weeks in a 52-week period and benefits only replace up to 50% of income with a maximum benefit of $170 per week.
These state programs may provide some short-term coverage to help workers manage temporary emergencies, but they aren’t designed to cover long-term disabilities.
For long-term coverage, you need private disability insurance coverage.
Doesn’t Social Security Disability Insurance Provide Coverage?
- The Social Security Disability Insurance program can provide long-term coverage, but only in the case of a severe disability that prevents the person from doing basic work-related activities. A severe disability is expected to last at least one year or result in death.
- The strict requirements mean that the majority of people who apply for Social Security disability benefits are denied. Those who do qualify receive only modest disability benefits.
- In summary, the Social Security Disability Insurance program provides important coverage for some severely-disabled individuals. However, if you’re looking for robust coverage to replace a significant portion of your income, you’ll need private disability insurance.
What About Workers’ Compensation?
In most states, the majority of employers are required to provide workers’ compensation insurance. This means if you are injured on the job, you should be able to apply for workers’ compensation benefits.
However, there are a few caveats.
Firstly, some people don’t have access to workers’ compensation. For example, if you’re self-employed, you probably don’t have coverage.
Secondly, workers’ compensation only applies to work-related illnesses or injuries. What if you’re injured in a car crash? What if you hurt yourself on a skiing trip? What if you develop cancer, heart disease, or another chronic condition that has nothing to do with your job?
Many illnesses and injuries are unrelated to work, meaning workers’ compensation won’t provide coverage. You need income protection in the form of private disability insurance.
Job-Based Disability Income Insurance
You may have access to disability insurance through your job. If so, these benefits can provide you with some coverage if you experience a disability and can’t work as a result. However, there are a few things to know about this coverage.
Firstly, most people aren’t covered. The U.S. Bureau of Labor Statistics says that only 40% of civilian workers have access to short-term disability insurance through work and only 35% have access to long-term disability insurance. Furthermore, freelance workers and other self-employed individuals do not usually have access to benefits (except through coverage they buy for themselves) – and this includes disability insurance.
Secondly, there’s a big difference between short-term disability insurance and long-term disability coverage. Short-term coverage is more common, but the maximum benefit may be a year or even six months. After that, your benefits will end, even if you’re not ready to go back to work.
Finally, employers often offer benefits on a group basis. The upside to this is you can gain coverage easily and without going through medical underwriting. The downside is you probably can’t customize coverage to meet your needs.
Individual Disability Insurance
- You can purchase individual disability insurance on your own from a private insurance company. This can be a great way to secure coverage your job doesn’t provide. It can also be a great way to supplement coverage that isn’t enough to meet your needs – for example, if the benefits don’t replace enough of your income or the maximum benefit period isn’t long enough.
- Individual disability insurance provides long-term coverage. The maximum benefit period varies – different private insurance companies offer different terms – but it’s usually at least two years and can be much longer. In fact, it’s possible to buy disability insurance coverage that will provide benefits until you reach retirement age.
Individual Disability Insurance Is Portable
- Since employers do not offer individual disability insurance, coverage is not tied to your job. If you switch jobs, you can keep your coverage.
- One reason this is important is it can be harder to secure affordable disability insurance coverage if you have a chronic condition. Think about what might happen if you decide that your job-based disability insurance is enough. Years later, you leave your employer and start working for a new company. As the new company doesn’t provide disability insurance, you decide to buy individual disability insurance. However, as you’ve developed a couple of health conditions, you have to pay more – and some insurance companies reject your application all together.
- The best time to lock in coverage is when you’re young and healthy. If you buy individual disability insurance, you can keep your coverage as your career advances. If the policy is guaranteed renewable, the insurer can’t cancel coverage as long as you pay your premiums. If it’s non-cancelable, the insurer can’t cancel your policy or raise rates as long as you pay your premiums. In addition, look for a policy with a benefit increase rider that lets you increase your benefits without the need for additional medical underwriting as your salary increases.
Customizing Your Long-Term Disability Insurance
One of the great things about individual disability insurance is you can customize coverage to meet your needs. Different disability insurance companies sell policies with terms that vary significantly. By reviewing the different coverage options, you can find coverage that meets your specific needs while staying within your budget.
Some perks are standard, meaning you don’t have to pay extra from them. Other perks are optional and may increase the cost of your coverage. If you think a benefit is worth the cost, get it. Otherwise, you can save money on disability insurance by going without the extras.
Additional benefits are often available through riders, which are provisions that modify your coverage. Disability insurance riders might provide cost-of-living adjustments, family care benefits, student loan repayments, and more.
Another element to consider is the definition of disability. Occupation disability insurance policies provide benefits if you can’t work in any job that’s suitable for you. Own occupation disability insurance policies provide more robust coverage and pay benefits if you can’t work in the job you’ve trained to do. This can be important for doctors and other professionals who work in highly-specialized fields, but the extra cost associated with the coverage may not be worthwhile for other workers.
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- If you want protection for your mortgage as well as other costs, you need individual disability insurance.