Understanding the Basics of Disability Insurance

We live in an age where we have to protect ourselves from just about everything. We have life insurance in case we die too soon. Health insurance in case we get hurt. Auto insurance in case we get into a car wreck. With all these insurances it is easy to overlook one of the most important ones out there: disability insurance.

It is estimated that 3 out of 10 20 something’s will become disabled before the age of 65. This means that 30% of young people will miss out on their full earning potential before they reach retirement age. If they are not insured, they will likely have to rely on the good graces of friends and family to help them through the rest of their life; that reliance can strain relationships. But if they have taken the time to understand disability insurance, and purchase a simple plan, they might not be so bad off.

Short Term Disability Insurance

There are two types of disability. Short-term is one that will cover the insured for a shorter period of time. Normally this is provided as a benefit through work, and the vast majority of those who have it will not go out and purchase it on their own. In order to make a claim a person has to be injured and out of work for 7 days before benefits kick in. This waiting period helps to weed out those who would try to claim disability for the flu or a cold. Benefits will then pay for 3 to 6 months, depending on the terms of the policy. At that point a long-term disability policy ought to take effect.

Long Term Disability Insurance

Many employers will also offer this policy as a perk of employment. However, it should be noted that most group policies (those provided through work) only cover around 60% of a person’s salary, and the benefit is almost always taxable. An individual policy, on the other hand, can cover up to about 95% of their salary, and it is rarely ever taxable.

Long term disability policies have a waiting period of 3 to 6 months before they start paying out. The longer the waiting period, the cheaper the premiums will be.

What Disability Insurance is not

The biggest mistake people make is thinking that a disability policy will only pay out if they are injured on the job. For on the job injuries that take a person out of work for an extended period of time, a disability policy may cover that, but more than likely the policy will not pay out because those injuries are covered through the employer’s worker’s comp insurance. Disability policies will cover any injury (with some exclusions like those that are the result of committing a felony) regardless of where it takes place.

Another common mistake is confusing “own occupation” coverage for “any occupation” coverage. Long term disability policies come in two varieties. One that is labeled as “own occupation” will still pay the benefits even if that person is able to go back to work in any profession other than the one he used to do. For instance, suppose a surgeon has an accident that leaves him without the use of his hand. He could go back to work as a teacher and collect both his salary and his disability payments. By contrast “any occupation” means that if the person can work in any occupation, the policy determines they are not disabled and thus will not pay benefits.

Wrapping it Up

Not having disability insurance is a huge oversight that millions of people commit. Your earning potential is the biggest asset that you have, with most people being able to earn several million dollars over the course of their lifetime. If you were injured, sick, or otherwise couldn’t work, would you be able to pay the bills? If not, it is time you looked into getting a disability insurance policy.