We get it. Insurance isn’t exactly an exciting topic. But imagine you get in an accident and are out of work for a few months—or even years. How are you going to pay your bills?
Even if you have a relatively safe desk job, you could fall, break your wrist, and have to be off your computer for several months. Or, you might develop a chronic condition, such as cancer, that keeps you out of work for much longer.
According to the U.S. Social Security Administration, over one in four 20-somethings become disabled before turning 67.
Disability insurance could be one of your safety nets.
The two types of disability insurance
In exchange for paying your insurance premium (i.e., your bill), a disability insurance policy will send you a monthly payment when you’re unable to work due to injury or illness. The amount you’ll receive is based on your policy and how much money you were making before becoming disabled.
There are two types of disability insurance:
- Short-term disability insurance (STDI). Will generally start paying out after one day to two weeks have passed and may cover 60 to 70% of your base pay. You might be able to receive these payments for several months to a year if you can’t return to work.
- Long-term disability insurance (LTDI). Often you have to wait 30 to 180 days before you start receiving your benefits, which will generally be for around 40 to 60% of your base pay. You’ll receive the insurance payments until you’re able to work again, after a predetermined number of years or when you turn 67.
While the short-term insurance quickly starts paying out, alas, it won’t continue paying out for very long. It takes longer for the long-term disability payments to start paying out, but you’ll have income for years to come.
Important terms to know when shopping for disability insurance
Insurance policies are loaded with fine print, and while we won’t go through everything here, there are a few especially important terms and ideas to understand when you’re considering buying disability insurance.
- Elimination period. How long you need to wait before the insurance starts paying out.
- Maximum benefit period/benefit duration. How long you can receive payments for if you become disabled.
- Waiver of premiums. Whether the policy will let you stop making premium payments while you’re disabled.
- Own or any occupation. Some policies will cover you when you’re unable to continue with the same type of work. Others will only pay out if you can’t do any type of work.
- Full or partial disability. Some will only cover you if you’re fully disabled, while others might send you partial payments if you’re able to work part-time.
- Pre-existing conditions. You might have to pay an extra fee or might not be able to get coverage if you have pre-existing conditions. Or, in some cases, you can still get coverage at the normal rate, but the policy won’t cover disabilities related to the pre-existing condition until after you’ve had the policy for at least certain period, such as 12 months.
- Requirements. The policy may outline the steps you need to take to qualify for and receive benefits. For example, you may need to be regularly seeing a doctor for treatment of your disability or illness and give the insurance company access to your medical and financial records to continually receive the benefits.
- Limitations/exclusions. Review the circumstances when you won’t be covered. As an example, some policies insurance might not cover you if you were injured while participating in an illegal activity. There could also be restrictions or extra requirements if you’re unable to work due to a mental or emotional condition, drug or alcohol abuse.
Are short- or long-term policies worth the cost?
Generally, the younger and healthier you are, the less you’ll have to pay for disability insurance. However, the costs can vary for many reasons, including:
- The insurance company
- How dangerous your work is
- Your age and sex
- The monthly benefit
- The elimination period
- Whether you smoke
- Whether you have pre-existing conditions
- A policy’s other terms, such as whether it covers partial disabilities.
If you find policies are too expensive, you might be able to lower your costs by choosing a policy that requires you wait longer before receiving payments (i.e., increasing the elimination period). Also, while there’s a maximum monthly benefit based on your current pay, you could choose a lower monthly payment to decrease your premiums.
In general, short-term disability insurance can be expensive and might not be worth it unless you’re able to get a heavily discounted or subsidized policy through your work. You may be better off saving your money each month and building an emergency fund that can help you get through a short-term disability.
On the other hand, long-term disability insurance is often less expensive and could be well worth the cost considering it will cover you for years if you become disabled.
There are also other safety nets, such as Social Security disability benefits, worker’s compensation, and state-run short-term disability programs. However, it can be hard to qualify for these programs, or they might not provide as much coverage as private disability insurance.
How to buy coverage
There are several ways to purchase short- and long-term disability insurance policies:
- You may be able to buy coverage through your employer, and the company might pay for some (or all) of the premiums. Even if the company doesn’t help pay for the insurance, you might be able to get a cheaper, group rate if you purchase coverage through your company.
- Alternatively, you could buy a policy directly from an insurance company or by going through an insurance broker, a salesperson who can help you compare options.
- You might also be able to get a group rate by purchasing insurance through an alumni group or professional association that you’re part of. For example, the Freelancer’s Union offers group rate policies to freelancers and independent workers.
Purchasing a policy through your work can often save you money. However, your coverage might end if you decide to leave that job. Additionally, if you have coverage from your employer and the premium payments are tax deductible, you will have to pay taxes on the benefits you receive while you’re unable to work.
If you have an individual or employer-sponsored plan and pay with “post-tax” money (meaning, you don’t get a tax deduction), then you get to keep the full benefit amount and won’t have to pay income taxes on your monthly benefit.
Some people decide to buy an individual policy even if they’re covered at work because they want to be certain the coverage will follow them after leaving the job, or they decide the employer’s plan isn’t sufficient.
Shopping plans and providers could help you save money and find a policy with the terms you want. You can start by looking online, where you can find guides for purchasing disability insurance and reviews of different insurance companies. You could then apply through a group or employer, directly with the insurance company, or with an insurance broker.
Louis DeNicola is a freelance personal finance writer and credit enthusiast. You can find him on Twitter @is_lou.
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