What are Disabilities Policies and Why Would You Need One?Submitted by Younity Wealth Partners on March 19th, 2017
Updated: March 19th, 2017 by Kara Downing, CFP®
The prospect of suddenly having to face life with a disability that limits your ability to work in the way you’re used always seems unlikely. Disability is something other people face, maybe in old age, but not you. While disability insurance may seem unnecessary right now the facts give cause for the preemptive action. Approximately 12% of the total American population and more than 37 million Americans are categorized as disabled; more than half those disabled Americans are between the working ages of 18-64. Additionally, just over 25% of current 20-year-olds will become disabled before they reach retirement age.
Hopefully nothing ever happens that will limit your mobility or personal and professional productivity. But, in the off chance of an accident or the lasting effects of an illness you will be retroactively glad you invested in a disability insurance policy when you did.
Since health insurance is required to avoid a tax fee unless you can prove exemption, most people have an adequate health insurance plan to cover the unexpected broken bone or medicine for the seasonal illness. But, even if health insurance covers the costs associated with a serious injury or illness, it won’t cover the lost wages associated with the costs of lost earnings in both the short and long-term. Like it’s much better known plan relative, life insurance, disability insurance serves as protector of your future income that could be lost due to disability-related causes. Disability insurance won’t replace your salary, but it will provide an important buffer for financial stability.
So, how do you know if you should invest in a disability insurance policy? If you rely on your income to cover the costs of your basic needs, it’s a good idea and as important as life insurance. That being said, not all disability insurance policies are built the same. Plans offer different levels coverage, some of which may not be adequate to your potential situation. Because you’re planning for something that may or may not happen to various degrees of disability.
The first place to begin looking into disability policies is to look at your current insurance provider. For the majority of Americans, that provider is going to be their employer; 66% of non-elderly employees were offered employer-covered insurance health insurance and 56% of all households were covered by employer-sponsored health insurance in 2014.
Another option is individual insurance policies. You’ll want to price shop as coverage differs, so even if your employer does offer disability coverage it may not be sufficient and you should consider individual coverage.
Short or Long-Term?
Before you drop regular premium payments on yet another insurance policy it’s important to know what type of disability coverage you want to purchase. Long-term disability insurance is truly the better bet when it comes to gambling with health. Thankfully advances in medicine and technology are allowing humans to live even after severe illnesses or injuries, but that also means you can live for a long time without being able to fully work. In general, long-term disability insurance can cover around half to 70% of a salary, but that salary is set at the time the policy is obtained. As you gain promotions and salary increases it’s wise to increase the plan value and to do so may require an annual physical or other requirements.
Be sure to zoom in on how the policy defines “disability.” For some plans that includes categories like mental illness and others exclude categories such as injuries acquired from dangerous activities. The payout for long-term disability can look very different, ranging in five to 10 years of payout, to a pay out until 65-years-old.
Comparatively, short-term disability will cover more of a salary (around 100% of income for the initial payout) and is used in lieu of salary for the insured who misses up to six months or less of work. If the insured still cannot return to work after a certain term, coverage drops down to around 60% of the salary.
Just because you purchase a disability insurance policy doesn’t mean it cannot be revoked or changed. The two main types of policy assurances you’ll see are “non-cancelable” and “guaranteed renewable.” If premiums are similar, non-cancelable is usually the best way to go as the insurance company can’t raise the policy premium. It’s essentially double the guarantee. Policies marked as guaranteed renewable mean that so long as premium payments are paid, the insurance company cannot drop it.
Most policies you find will be designated as “any-occupation.” This means that the policy owner must work when capable even if not to the same level as prior to the disability; this requires an analysis of the “gainful” employability of the policyholder. With any-occupation policies, long-term disability benefits are awarded if the disability inhibits the policyholder from finding and keeping work that will allow for at least 60% of the salary pre-disability. Another option, “own-occupation” largely benefits the policyholder with a high salary and highly skilled occupation. This type of policy allows for the individual to collect benefits until they can resume their occupation as it was before the disability arose.
Policies can also be written to include different “riders,” or options. One important rider is “cost of living” (COLA). With COLA, a policy’s total value increases as inflation does. Additionally, residual benefits make up the difference between old and new salaries following the diagnosis of disability, if the policyholder can indeed get a new job but one that’s not up to the same salary as the one pre-disability.
You’re not alone in looking toward disability insurance. More than 650,000 disabled employees received a collective $9 billion in long-term disability benefits from employer-sponsored group disability coverage, in 2012. Before you take any action, look into all your current and potential disability insurance plan options and speak with your trusted financial advisor.