One of the most important assets that you have is your ability to earn a living. Think about it: All of your plans for the future -- from buying a home to putting your kids through college to building a retirement nest egg -- are based on the assumption you will continue to earn a paycheck until you retire. But what would happen if your paychecks stopped?
Disability insurance provides you with an income should you become sick or injured and unable to work. It helps protect against family financial catastrophe by giving you an income to meet daily expenses.
According to a study conducted by America's Health Insurance Plans, National Association of Insurance Commissioners, and the U.S. Commerce Department, the chances of a disability occuring can be high. There is a 1 in 3 chance that a disability will last 3 months or more, 1 in 5 chance that it will last 1 year or more, and a 1 in 7 chance that it will last 5 years or more.
There are multiple sources of Disability Income Protection.
- Worker's Compensation -- Worker's compensation is available if you become disabled and might provide up to 2/3 of your income. However, it will only pay you benefits if your illness or injury is related to your work. In fact, based on the National Saftey Council, Injury Facts 2004 Ed., 90% of disabilities occur outside of the workplace.
State Disability Insurance Programs -- Some states provide short-term disability coverage, funded through payroll taxes, that would provide you with benefits for up to six months.
Social Security -- This is a federal government administered program that covers most workers. It can be difficult to qualify for social security disability and roughly 60% of initial social security applications are denied. In addition, the payments can be very modest.
Employer-Sponsored Coverage -- The two main forms of employer-sponsored disability coverage are short-term disability and long-term disability. Short-term disability will provide you a percentage of your income for 3 to 6 months. Long-term disability coverage will begin following those 90 to 180 days and continue on to your ge 65.
- Individual Disability Insurance -- Individual Disability Insurance is coverage that you purchase on your own. It is not tied to your employer and will provide you coverage even if you change your employer.
What to Know When Buying Disability Insurance
A number of factors determine the cost of an individual disability income policy, including the following:
Age - Younger persons pay less per year for a policy than those who are older and more likely to become disabled. Note that the vast majority of companies do not issue policies for people older than 60.
Benefit Amount - Policies that replace more of an individual's salary are more expensive. A policy that replaces 80 percent of your salary costs more than one that replaces only 60 percent of your salary.
Benefit Period - The shorter the benefit period, the less expensive the policy. For example, a policy with a two-year benefit costs less than a policy that pays benefits to age 65, or the retirement age specified under Social Security.
Current Health Status - Your health status determines whether you are eligible for standard rates or rates that are higher. A policy also may exclude from coverage any health conditions that exist before the policy is issued.
Definition of Disability - A policy that pays benefits if you are unable to perform the duties of your own occupation is more expensive than a policy that pays benefits if you are unable to perform the duties of any job for which you are reasonably qualified.
Elimination period - This is the waiting period before benefit payments will begin. The waiting period usually ranges anywhere from the 31st day to six months or more after the onset of the disability. Depending on how much money you have saved, and your other resources, you can reduce your premiums by electing to wait 60 days, 90 days, or even six months before you start to receive benefit payments.
Discounts - many companies offer discounts for policies issued at the same time on more than one person, as well as when an employer (or association) collects the premiums for individual policies from employees and pays the insurer.
Extent of Disability - A policy that pays benefits only if the policyholder is totally and permanently disabled costs less than a policy that also pays benefits for a partial or temporary disability.
Gender - Women usually pay more than men for an individual policy because claim costs are higher for women than men. Under a group policy, however, men and women typically pay the same rate.
Optional Benefits - For an extra premium, some policies offer additional benefits, such as cost-of-living increases or the option to purchase higher benefits in the future.
Smoker/Tobacco Use - Most companies either give a discount to non-tobacco users or add a surcharge to the premium for tobacco use.
Type of Job - Expect to pay more for a policy that covers a high-risk occupation compared to a low-risk occupation.
For more information on Disability Insurance, contact The Hancock Group at (814) 944-8849.