Have you ever had friends or colleagues get hit with health issues that left them unable to work for months (or even years) at a time? It’s hard watching others struggle to make ends meet when life throws a curveball. And it’s even harder to imagine if it were you and your family.
What would an income loss mean for you? It would probably be stressful, frustrating, and even a little scary. The good news is, you can patch up this hole in your financial safety net with long-term disability insurance.
What Is Disability Insurance?
In general, disability insurance covers some of your income if something happens to you (like an illness or injury) and you can’t work.
The younger and healthier you are, the easier it is to qualify for a policy. But as you age, premiums increase. And if your health goes south, you may find it hard to qualify for an affordable policy at all.
But disability insurance doesn’t just cover freak accidents. Most claims are for things you may not realize are considered disabilities, like physical injuries, a heart attack, or cancer. These things could happen to anyone in any workplace.
Why You Need Disability Insurance
Think none of these will happen to you? Think again. The Social Security Administration (SSA) reports that one in four of today’s 20-year-olds will become disabled for 90 days or more before they turn 67 years old—and that a massive 68% of non-government workers have no disability insurance.(1) Yikes!
Having a plan for the long term – beyond a 3-6 month emergency fund – is important not only to you, but also the people who rely on your income. How much better would it feel to know money is still coming in while you’re recovering?
What Are the Types of Disability Insurance?
Now, there are two types of disability insurance you’ll see a lot of: short term and long term. They basically do the same thing in how they replace part of your monthly salary. But we’ll get more into that later.
Even though they do the same thing, short-term and long-term disability insurance have some differences you need to know about. Here’s how they stack up:
How much does it cover?
Around 60–70% of your salary
40–60% of your salary (but we recommend finding a policy that covers 60–70%)
How long does it last?
Usually 3-6 months —but that depends on the policy
Five years or longer if your disability continues
How much does it cost?
1–3% of your yearly income (but tends to be more expensive than long-term coverage)
1–3% percent of your yearly income
How soon would you get your first payout?
Around two weeks from when the doctor confirms you have a disability
Usually around 3-6 months
Why would you get it?
Only if your employer offers it at no cost to you
If you rely on your income and you don’t have savings to replace it long term
Long-Term Disability Insurance
We think long-term disability insurance is the only plan worth buying. But how long is long-term coverage? Anything over two years and up until retirement age is considered a long-term policy (but you could extend it into retirement if you wanted to). And whether you’re working at a desk or a construction site, you’ll want something in place until you turn 65.
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We recommend getting as much coverage as you can—around 60–70% of your income. If you take out your own policy, it will stay with you whenever you change jobs. But it’s cheaper if you can buy it through your employer. (Filing a claim will require proof of an employment income to replace.) Talk to your human resources department about setting it up.
When you look at the numbers, long-term disability insurance really is your best option. We recommend getting coverage for at least 5 years or more, to cover long-term loss of income that your 3-6 month emergency fund won’t cover.
The only downside to long-term coverage is the elimination period (how long you have to wait before that first check arrives after the doctor confirms you’re disabled). Because long-term disability is designed to kick in after short-term disability, there is usually an elimination period of several months. The average time it takes to process a long-term claim is around 90 days.
Short-Term Disability Insurance
Short-term disability insurance is exactly that: short. Payments only last for a few months to a year. The elimination period is normally around two weeks—so you can get your payout faster than with long-term coverage. But when it comes to cost, short-term premiums are around the same (but usually more expensive) than long-term premiums.
Basically, unless your employer is offering short-term coverage free of charge to you, don’t get it. You can put together your own short-term disability coverage by saving 3–6 months of expenses in an emergency fund! If you get sick or injured and have to take time off work for a few months, your savings can fill in the gaps until you get back on your feet.
How Much Does Disability Insurance Cost?
Disability insurance costs (aka premiums) for both short-term and long-term coverage can range from 1% to 3% of your annual income. So if you make $50,000 a year, that’s $60 to $125 monthly. But you’ll pay less if you’re get a long-term policy with a longer elimination period. If you can, get a “non-cancellable insurance policy” that, you guessed it, can’t be cancelled by the insurance company even if your health changes.
Other things that affect how much you pay in premiums every month are your age, if you smoke, what you do for a living, and how much money you make. (Because if you earn a lot, it’s going to cost more to protect those earnings.)
And since insurance companies aren’t known for making things easy, another thing that impacts disability insurance cost is their definition of disability. If you want a policy that covers your job as a chimney sweep specifically, your premium would cost more compared to a policy that covers you at an office job.
Who Needs Disability Insurance?
Everyone! You should have long-term disability insurance regardless of what job you have—whether you’re a high-rise window washer or a car salesperson. The reality is, you’re more likely to become disabled while working with heavy equipment or machinery than you are sitting at a computer all day, but don’t let this prevent you from protecting your income for the long haul.
By the way, if you're in a risky job working as a firefighter, policeman or shark handler, you're going to see higher disability insurance premiums in comparison to those of a telemarketer.
Fortunately, disability insurance is a common perk offered by employers if you have a high-risk job. Just remember: disability insurance isn’t there to make you rich! It’s there to pay the bills and put food on the table if something happens to you.
What Isn’t Covered by Disability Insurance?
Disability insurance is only designed to replace a portion of your income -- it doesn’t cover extra expenses like your medical bills and long-term care costs.
While pregnancy isn’t usually covered by long-term policies, complications that extend beyond pregnancy (like if a doctor orders you to stay at home after a C-section) might qualify you for benefits—but only if you had a long-term policy in place before you got pregnant.
Short-term policies do cover birth as a disability, but you might be waiting a long six-to-eight weeks for each check.
How to Get Disability Insurance
You can get disability insurance by finding out if your employer offers a long-term disability insurance plan. If they don’t, then you need to get in touch with an insurance professional. Dave recommends Zander Insurance. They’ll walk you through the process and help you get the right amount of disability insurance for your specific situation.
Dealing with a disability can be scary enough without the extra worry of how you’re going pay the bills. That’s why protecting your paycheck with the right kind of disability insurance is a critical part of keeping your family and future secure. To get started in finding the best disability insurance option for you, check out our new Coverage Checkup Tool today!