Any time I blog about insurance, I get the sense that it makes most readers want to turn away!
It’s not a fun topic to consider because usually when you’re collecting it, something bad has happened, and most people don’t like to consider the negatives of life.
In order to be the most prepared financially, however, we have to cover all topics from a personal finance standpoint.
So bear with me as we tackle an often confusing, often misunderstood topic, disability insurance.
For those of you who want to stop reading, consider these statistics found on ProtectYourIncome.com:
- Three in 10 workers entering the work force today will become disabled before retiring.
Social Security Administration, Fact Sheet January 31, 2007 - An illness or accident will keep 1 in 5 workers out of work for at least a year before the age of 65.
Life and Health Insurance Foundation for Education, November 2005 - One in 7 workers can expect to be disabled for five years or more before retirement.
“Commissioners Disability Table, 1998,” Health Insurance Association of America, the New York Times, February 2000 - 71% of American employees live from paycheck to paycheck.
American Payroll Association, “Getting Paid in America” Survey, 2008 - Disability causes nearly 50% of all mortgage foreclosures, 2% are caused by death.
Health Affairs, the Policy Journal of the Health Sphere, 2 February 2005 - Close to 90% of disabling accidents and illnesses are not work related.
National Safety Council, Injury Facts 2008 Ed.
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What is Disability Insurance?
Disability insurance is one of the most confusing and often overlooked forms of insurance out there. In its simplest form, it offers income replacement to an individual who is unable to work.
So, let’s say you were to get sick or hurt for a period of time – disability insurance would pay you a portion of your income while you are unable to work. Long-term disability insurance can cover you for the length of your disability up til age 65 in many cases or for a specified number of years, or until you are able to return to work.
The Social Security Administration estimates in their December 31, 2007 fact sheet that seventy percent of the private sector workforce has no long-term disability insurance. That’s a scary thought – that seven out of 10 folks do not have any long-term coverage.
Remember, a person’s ability to earn an income is usually their biggest financial asset, so anyone who depends on earned income should probably consider this type of insurance. For those of you who have people depending on your income, your need for disability insurance is even greater!
How Much Coverage Do You Need?
There is no hard or fast rule that says you need to have a certain amount. Generally though, it’s a good idea to get as much as you can afford to buy! Why? Because again, a person’s income-earning ability is their greatest asset and so you want to protect that as much as possible!
Before you buy any type of insurance, it’s good to ask questions. Here’s some things to consider when looking into disability insurance:
- What is your gross income?
- How much are your fixed expenses?
- Should you need this insurance, what types of goals do you still want to save for (i.e. retirement, kid’s college etc)?
- Do you have group disability insurance through work?
- How much can you afford?
What Should You Do?
The first thing you’ll want to do is check with your current employer to see if you are covered through work. If you are under a group policy through your job, that’s a great start! But it doesn’t just end there.
Secondly, if you do fall under a group policy, find out if you can increase your coverage. Sometimes you can pay a little extra to get some added benefit, so just do some investigation.
You don’t want to just stop with group coverage though because typically these policies will pay roughly 60% of your income on a pre-tax basis.
So, what that means is if you’re single and making $60,000 a year or $5,000 per month and you get sick or hurt, your group policy will pay you $3,000 a month. You’ll have to back out taxes on that (let’s assume an average rate of 20%) – you’re looking at a take home pay of $2,400 per month! How much do you think that will affect your budget and your goals?
Next you’ll want to shop around to get a quote on individual disability policies to see if it works into your budget and makes sense for you financially.
Lastly, this type of insurance is based mainly on age and health. So don’t wait until you get older and unhealthy. Do your homework today! We need to protect against life’s storms, and we never know what is lurking around the corner. I know most of us think, “It’ll never happen to me” – but we need to be prepared.
Places To Get Long Term Disability
What are your thoughts on disability insurance?
- Do you have a disability insurance policy through work or individually?
- Do you think these policies are worth it, and have you had any experience collecting on these policies?
Group policies are only taxable if the employer pays for them. If the employee pays then the benefits are taxed. Also, the other huge way they fall short is that they only cover your salary. Any bonuses or commissions you get usually are not covered. Most group disability policies are grossly inadequate but they are better than nothing.
Evolution Of Wealth´s last post ..What Every Life Insurance Policy Shouldn’t Be Without
Excellent point EOW!! Thank you for that clarification.
Jason @ Redeeming Riches´s last post ..Should a Christian Business Be Unequally Yoked?
That’s why I pay for my disability insurance with after tax dollars. Benefits are not subject to taxes when the premiums are paid with after tax money! That $3,000 stays at $3,000.
The standard practice is for employees to pay with after tax dollars, thereby making the benefits tax free. In fact, I have never seen it any other way at any company I have worked for.
Mike:
From my experience, most of the smaller companies do it that way because they don’t want to or don’t have the cash flow to pay for this benefit. Larger companies tend to pay for it. Also when a company pays for it more people take advantage of it and have some disability coverage. It’s the opt-out/opt-in paradigm with a cost to opt in so you’ll get a lot less people enrolling in it when it costs them money thus the statistics of all those people without any disability coverage.
There’s a few other ways that group disability policies don’t even come close to providing the same coverage as an individual policy but I don’t want to bore you all. The link to my post is above.
Evolution Of Wealth´s last post ..What Every Life Insurance Policy Shouldn’t Be Without
Yeah, I agree, most of the larger companies do provide it and pay for it. Many of the smaller companies don’t even offer it at all. At any rate, just remember that employer paid equals taxable benefits, employee paid with after-tax dollars equals non-taxable benefits!
Jason @ Redeeming Riches´s last post ..Should You Open a Roth IRA?
EXCELLENT article and crucial topic. A good friend of our died last year after a three year bout with cancer. He repeatedly told everyone who listened that his private disability insurance was a major factor in maintaining his sanity.
Great information. I would recommend these tips to all my friends and family. Will be in my roundup.
here is one thing I found out that was disappointing about disability insurance-
If you’re a blue collar worker, you cant get this insurance to age 65! The most you can get it for is 5 years. Why? Well, insurance companies know that blue collar workers that do manual labor are more likely to get injured than a person pushing papers in an office. So they won’t insure blue collar workers for beyond 5 years! :(
This means if you’re a blue collar worker and get injured, you are covered for 5 years with this insurance. After that, your coverage/income stops and you’re own your own.
So my question is that I can’t seem to find an answer to is: Should a blue collar worker get disability insurance since 5 years is all they can buy?
Arthur – I’m a big believer in “something is better than nothing”. So, if you do get sick or hurt for say four years – it sure would’ve been nice if you bought that policy that only paid you for five years. You never know what the situation will be so it’s better to be somewhat prepared than not at all.
Jason @ Redeeming Riches´s last post ..The Best Debt Everyone Should Have and Never Pay Off
Good point. When people ask me about disability insurance, I always answer: “If you die, your dependents will need money. But if you become disabled your dependents AND YOU will need money! What situation is worse?!”