by Karen Trepte
Something to consider for the self-employed or those entering retirement is the necessity of disability insurance. If you work through an employer who provides a pension, then there’s a good chance disability is included in your benefits, but even if it is, additional coverage is always a good investment.
Disability insurance covers bills, lost wages and insurance when you’re incapacitated temporarily or in the long-term. While most people who are covered never consider a scenario in which they need their insurance, being in a disabling situation and not having coverage can be catastrophic.
Whether you’re entering the workforce or considering your retirement, disability insurance can be life-altering if you don’t have it when the need arises.
Why disability is broader than you think
You might think of the word “disability” and think of dismemberment or some lifelong catastrophic illness, like MS. The fact is that there are so many conditions that qualify for disability and can prevent you from staying at your job. For example:
- Depression or anxiety
- PTSD
- Arthritis
- Cancer
- Diabetes
- Chronic pain
Any one of these and dozens of other conditions and scenarios can take you out of the workforce and without disability insurance, you could find yourself in lifelong debt. In some cases it might not even be up to you if you cannot return to work; many jobs have a minimum acceptable performance expectation and without being medically able to meet that threshold, you won’t be able to work.
It is also worth mentioning that many disability policies will not pay out in the event the disabling condition comes about from “reckless” behavior. This includes illicit drug use, skydiving, racing or any other activity where bodily harm is significantly more likely.
Let’s take a look at when to expect when using disability insurance.
How disability insurance works
If you’re in a disabling scenario and you have to leave work, there is a latency period before your insurance will pay anything to you. Often this period will be around 2 months, but it could be up to 90 days if your policy is bad.
During this period, it’s critical you have a savings set aside for emergency situations. Once the insurance kicks in, often the amount it pays is a fixed percentage of your wages. For instance, it’s not uncommon to get around 50-70% of your normal wages from a basic short-term disability insurance plan. This is where certain programs like AFLAC are helpful to bridge that gap between your normal wages and the disability rate.
Short term disability
Short term disability will pay out when you’re disabled but expected to recover. This could be something like a major surgery. While STD pays out quicker than long term disability, it tends to pay less. Premiums are generally higher than LTD as well.
Long term disability
Long term disability plans often only pay out after several years, and will continue to pay out for 3-10 years, or possibly until retirement. While long term disability has a much longer latency period, it often has lower premiums and covers you longer.
Own-occupation insurance
This type of coverage is more expensive than most disability coverage but it is exceptionally powerful. It pays you if you are specifically unable to work in your vocation. For instance, if you are a carpenter but cannot work as a carpenter, but you are able to work in a different job, this insurance will still pay out.
Any-occupation insurance
This coverage has lower premiums and will – as the name suggests – cover you if you’re unable to work at all, in any occupation. This coverage will likely pay less and be harder to claim as you need a more thorough medical disability endorsem*nt, but it’s far more common.
Partial versus full disability
If your disability is considered to be lifelong, then your plan will determine how much your disabling condition is “worth”. Permanent disability that allows you to work in certain jobs but not others will often result in a monthly payment equal to the amount of wages potentially lost by the disability.
Full disability will do the same but of course calculated at an amount equal to the expected total loss of income.
Considering your options
Disability insurance is critical, particularly for people with families or who might not have the ability to save up a large emergency fund. Disability coverage is often included for many employees who get insurance through their job. That said, it’s up to you to determine if it’s enough.
Both long term and short term coverage can be stacked to provide the best benefit for a lifelong disabling condition, but having both is often expensive. Additionally, if you’re young and can afford it – especially with a family – it’s absolutely worth it to get the best disability coverage you can afford.
Nobody expects to have to stop working because of injury or illness, but this is what makes it so difficult when it happens. Without disability coverage in your early career or right before retirement, you can find yourself in extraordinary debt and financial crisis.
Though it’s not a common type of insurance to think about, it’s one that everyone desperately needs to ensure the safety and security of themselves and their families.
