Disability Insurance
Most people overestimate the cost and underestimate the need for disability insurance. Many people live paycheck to paycheck and lack any significant real savings. They don’t have robust rainy day or emergency funds to cover the cost of an unexpected expense. In fact, loss of income and medical expenses are two top reasons that people cite when filing for bankruptcy. And that’s where Disability Insurance comes in, providing critical financial protection in the event that you are unable to work due to sickness or injury.
What is Disability Insurance?
Disability Insurance is insurance that provides benefits to the insured person if they experience an injury or illness that prevents them from working for an extended period of time. It typically pays 50% – 70% of your pre-disability wage, or what you were making before you stopped working. Your expenses don’t stop when you are sick or injured, and this important financial protection benefit helps replace your income while you recover so you can pay for all your expenses, such as mortgage/rent, utilities, groceries, and medical bills, to name only a few. There are two main types of disability insurance – Short Term and Long Term.
Short Term Disability Insurance
Short Term Disability (STD) Insurance provides coverage for a short period of time, typically around 6 months but usually less than one year. Most people think “disability” and their mind goes to catastrophic injuries or illness, but STD covers a broad spectrum of things that could keep you out of work. Some of the most common reasons for STD claims include childbirth, common injuries, simple surgeries and musculoskeletal conditions, such as a back condition.
An important component of disability insurance is that it is not simply enough for you to have a diagnosis or a condition, but it must be disabling. The insurance company will evaluate your medical information in comparison to your occupation’s requirements to determine if you are disabled from performing the duties of your occupation. The type of documentation needed can vary greatly depending on why someone is out of work. For example, a straightforward claim could be someone who had a baby and needs time to recover from childbirth or someone that had back surgery. For someone that might be out of work due to a chronic condition, such as back pain or depression and anxiety, more medical information may be needed to understand the level of severity of their condition and what has changed that is now preventing them from being able to work.
Disability insurance often comes with additional benefits, such as partial disability, which encourages and helps individuals return to work. Insurance companies will often work with employees, their doctors and their employer on helping to identify opportunities to assist employees in getting back to work, sometimes on a partial basis (for example, working 4 hour days instead of 8) or modified capacity (for example, someone that cannot lift over 20 lbs. but is normally required to would have their work responsibilities temporarily changed so that they can return to work without having to lift over 20 lbs.).
Long Term Disability Insurance
Long Term Disability (LTD) is similar to Short Term Disability, but offers additional protection if you are disabled and unable to work for an extended period of time, or in certain circumstances, for those that will never be able to return to work due to terminal illness or permanent disability.
Limitations of Benefits
It is important to understand the limitations of your coverage, for both short and long term disability, especially as this can vary by policy. Depending on the cause of your disability, benefits may not be payable. For example, if you were injured while working, this may be covered by Workers’ Compensation but not disability. Similarly, Workers’ Compensation only pays benefits for work-related conditions.
For Long Term Disability, it is very typical for your coverage to have two different definitions of disability, or ways of evaluating whether or not you are disabled and entitled to receive benefits. For example, for the first two years of benefits, the insurance company may evaluate you and your medical condition based on whether or not you can perform the duties of your occupation, similar to how you are evaluated in Short Term Disability. After two years, though, that definition commonly changes to a broader definition, meaning the insurance company will review your medical condition, your work experience, training and education, and determine whether or not you have the ability to perform any other type of occupation. This evaluation takes into consideration how much money you were earning before your disability. For example, if you have a permanent foot injury that prevents you from being on your feet for extended periods of time, such as standing or walking, you may not be able to return to work doing the job that you had before your injury, but you may have the skillset to do a desk job that doesn’t require standing or walking, at a comparable salary.
How To Get Disability Insurance
There are several channels where you might obtain disability insurance: through state mandated coverage, through your employer as a workplace benefit, purchasing on your own, or through the federal government.
State Mandated Coverage
Some states, such as California, mandate disability coverage. They may also mandate paid family leave, and some states combine disability and family leave coverage into one comprehensive program known as Paid Family and Medical Leave (PFML). It is important to know if you work (not live) in one of these states and understand the type of coverage and benefits you would receive through a state program. It may not be enough to rely only on a state program for benefits. Often, short term disability will complement this and you may be able to receive both at the same time.
Through Your Employer
Disability Insurance is a common workplace benefit that many employers offer. Your employer may choose to pay for the cost of coverage so that you don’t have to, require you to pay for the coverage, or a combination of the two may be available.
On Your Own
Individuals can also purchase their own disability insurance through an insurance broker, usually the same brokers who sell life insurance. This can be very beneficial for employees that do not have access to disability insurance through their employer, but also for certain employees that may have very specialized work and/or make a lot of money, and they want to supplement their employer-provided coverage with additional benefits and protection in the event they become disabled and unable to work. Individual coverage is more expensive than coverage offered through your employer.
Considering your own disability risk, and whether to purchase short term, long term, or both types of disability insurance is an important part of building a comprehensive personal financial plan.
Government Insurance
Social Security Disability Insurance (SSDI) is a government-sponsored disability insurance program. It is funded by taxes, and you may notice this coming out of your paycheck. But, just because you pay into it, doesn’t mean you are guaranteed benefits. There are eligibility requirements in that you need to work long enough to qualify, and also, Social Security evaluates disability based on whether or not you can do any type of occupation. It is a strict definition and you may not qualify for benefits if you are only expected to be out of work a couple of months. Additionally, the process to apply and receive benefits can take a long time (years) and many people are denied initially, so it is important to ensure you have proper disability coverage and financial protections in place.