People are living longer than ever. Life expectancy in the US is around 79 years. Statistics vary widely but it’s likely that at some point during your life you may be disabled. Whether you get hurt trying to move furniture or get hurt in a car accident, you may be unable to work for a few weeks or even years in your career.
Given the high likelihood of becoming disabled, many people don’t focus enough on disability insurance. In fact, it’s not uncommon to see people who have life insurance but no disability insurance.
Why Do You Need Disability Insurance?
In the event of a disability, you will quickly run through your emergency funds and savings. These policies will pay a certain percent of your salary for a period of time until you can get back to work.
These policies provide a safety net for you and your family while you are injured or ill. This is especially useful if you are out of the workforce for years as a result of an injury.
Short Term Vs Long Term Disability
As the name implies, short term disability insurance typically pays benefits a short time – typically 3 to 6 months, whereas long term disability insurance provides benefits for a longer period, usually in years until the employee can return to work or reaches an age where he or she can qualify for social security.
Examples of short term disability include injuries from minor car accidents or prolonged sickness. Long term disabilities include chronic back pain that prevents you from working, cancer, mental disorders, and cardiovascular problems.
If you get disabled, you may be covered by one of the following:
Workers’ compensation covers employees who are injured or suffer illness at the worksite. The program is managed at the state level and covers only incidents at the worksite. The program is offered free of cost to employees.
The main disadvantage of this program is that it does not cover incidents that happen outside of work. Most of us work in office jobs, and any injury that occurs is not related to our work.
Social Security Disability Insurance
Social Security Disability Insurance provides benefits if you cannot work completely. If you are able to work in a profession different from your primary profession, you won’t qualify for the program.
The application process to get disability benefits can be tedious, can take months and is hard to qualify.
Employer-Provided Disability Insurance
Employers provide subsidized long term and short term disability insurance policies. Short term policies typically pay 80% of your salary, and long term pay 50 to 60% of your salary. Many employers offer short term disability insurance and basic long term disability insurance free of cost to employees. Since the policy is tied to your job, you won’t have coverage if you lose your job.
Many employers offer 50% long term disability coverage for free and provide employees options to buy additional coverage at subsidized rates.
Private Disability Insurance Policy
If you buy disability insurance on your own, the policy is portable. The policy stays with you even as you move from job to job.
Private policies can be quite expensive. It’s best if you can buy disability insurance from your employer because you will get subsidized prices. The next option will be to get it through professional organizations as they tend to offer cheaper rates.
Disability Insurance Strategy
Private policies cost 1 to 3% of your annual salary in premiums every year. But if you buy it through your employer, it only costs a few dollars per month. Most people are better off buying the policies through their employers.
Ideally, you will carry long term disability insurance until you retire. If you are buying a private policy, buy a policy for a minimum of 5 years as average long term disability typically lasts 3 years. Understand that most of the policies will have a waiting period.
Whether you buy the policy through your employer or you buy it on your own, it is important that you have a disability insurance policy. You are more likely to need it than you think.