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.
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:
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.
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.
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:
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.
There are several ways to purchase short- and long-term disability insurance policies:
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.