A very important question we should all consider is whether we’d be able to cope financially should we, or the chief income earner in our household, become unable to work due to an illness or disability. It is for this reason that we should consider disability insurance, sometimes known as income protection, for ourselves or for the main earner of our household.
What is disability insurance and why might we need it?
Disability insurance is a form of insurance that provides income for individuals who are unable to work due to an accident or illness. It helps them with the costs of living and provides income in case they are unable to work.
Many people don’t know that disability insurance is not just for when one becomes disabled, but it can also be used in the event of accidents or illnesses that keep one from working for a period of time. It’s important that individuals know what constitutes “disability” because some type of injuries or illnesses may not qualify under certain plans.
As Wikipedia explains, disability income insurance can provide protection if we ever find ourselves with ‘an inability to maintain composure in the case of psychological disorders or suffer an injury, illness or condition that causes physical impairment or incapacity to work.’
If we were to find ourselves in such a position that we could not work for an extended period of time, then it is unlikely an employer would continue to pay a full wage, or any wage, during recovery. Also, it may be that the illness or disability is long-term or permanent thus forcing us to quit the employment and being unable to seek an alternative job or career.
Although we may not like to think about such unfortunate circumstances, no one knows what is around the corner and being financially secure, should the worst happen, is something we all need to plan and prepare for.
How does disability insurance work?
Some companies offer this benefit as a part of an employee’s benefits package while most individuals buy it on their own. Disability insurance can be purchased online through various providers.
Firstly, check with your employer in case they already have a suitable scheme. Otherwise, you can choose to do your own research and source your own disability insurance at your own cost.
The two main types of disability insurance are long term disability insurance (LTD) and short term disability (STD).
- Long term disability insurance
Long-term disability insurance is insurance that pays you a monthly benefit, often 50-70% of your salary, if you are unable to work for an extended period of time due to illness or injury. The need for long-term disability coverage is often overlooked by people because they think it won’t happen to them. But there are many illnesses and injuries that can lead to long-term disabilities, like cancer, Alzheimer’s disease, back pain and some mental health issues like depression.
To qualify for benefits under this type of coverage, you must be unable to perform the basic functions of your work. This could mean that you can’t walk or climb stairs or lift or carry anything heavier than 20 pounds. You also must not be able to perform any other work in order to qualify for benefits. What does and does not qualify for a successful claim can vary between insurance providers, so it’s best to check what is covered before signing and agreeing to any insurance policy to ensure it meets your needs.
- Short term disability insurance
In contrast to the more common long-term disability, which covers employees when they can’t work due to illness or injury that lasts over one year, short term disability insurance differs from long term disability insurance in several ways. Short term disability insurance is a type of insurance that covers gaps in income for employees who are temporarily disabled. First of all, it pays out for a shorter duration. Secondly, it usually only pays out 40-60% of an employee’s salary during the time they are disabled. This makes short term disability more affordable for employers and employees. Finally, short-term policies will often cover an employee’s spouse or other dependents who may not be eligible for coverage under a long-term policy.
Should I get short term or long term disability insurance?
You can get both and they work together to ensure you are financially covered in the event of a long term illness or disability. There is a waiting period for each insurance type to kick in, which is much longer for a long-term policy, so the short-term policy would therefore cover your income until you pass the elimination period.
If you have an emergency fund in place or enough savings to cover the short-term period then you may opt for the long-term only. However, it’s important to consider how using your own savings or emergency fund could impact your retirement fund or what else could be the consequence of using this money if it’s not intended to be used as day-to-day income.
Disability insurance cost can vary
You will need to find a suitable provider, and like with most insurances, agree on your rate of cover. With disability insurance, this will be a percentage of your income that will be paid on a monthly basis if you cannot work and your disability meets those listed. The insurer may have a fixed percentage, or you may be able to choose your coverage level. Obviously, the more income you want to protect, the higher your insurance payments will be.
The cost of the disability insurance can vary depending on the age you are when you start the policy, your type of income and whether it’s classed as high-risk or low-risk, as well as your annual income.
Won’t I be covered by state disability benefits?
If you become disabled or too ill to work, then yes, you may be able to claim some state benefits. However, if you have a well-paid job then it’s unlikely the state benefits will be at the same level, so you may lose income. State benefits can also have a long processing time, so you need to think about how to protect your income in the interim.
Depending on your career you may also qualify for other benefits and discounts such as specially priced car insurance for disabled veterans. If your disability was caused at work, you may even be entitled to compensation. However, even with all this in mind, you still need to know how you will immediately pay your day-to-day living costs and bills in the event of an accident. Applying for and claiming any other benefits or discounts you may be entitled to can take time. Short-term disability insurance can ensure you are covered for your living costs before the state benefits kick in, and that’s if you qualify for them.
It might not just be your income you lose…
Also, you need to consider that you may be too ill with an illness or disability to care for yourself. In this case, your better half or another family member or friend may need to become your carer, thus potentially losing their income too.
In this case, a short-term policy may offer additional income support for a carer. There are also government schemes to provide benefits to carers that meet certain criteria, such as caring a minimum number of hours per week to qualify for income support.
Plan for the future
It’s vital to plan for the future and consider all outcomes with regard to your health. Anyone can fall ill and anyone can be in an accident and suffer an unexpected injury short-term or long-term. It’s important to think about how you will cope financially in these situations and whether disability insurance will ensure you can maintain your standard of life, or at least your day-to-day living costs without worry.