A Simple Guide to Disability Insurance in 2020

The following blog is a a guest post from our friends at Breeze, an online disability insurance provider.

A Simple Guide to Disability Insurance in 2020

Insurance is an essential component of any sound financial plan. Health, life, home, and auto insurance are probably the main types of coverage that come to mind. 

Once you have these taken care of, it’s easy to forget about other types of coverage you may need as well. Disability insurance is a perfect example. It protects your ability to earn an income and meet your financial needs in life, but it’s commonly overlooked due to confusion about how it works.

In this simple guide, we break down the basics of disability insurance.

How Disability Insurance Works

Disability insurance is designed to replace a percentage of your monthly income if an injury or illness limits your ability to work for an extended period of time. Think of it as protection for your paycheck.

The right disability insurance policy should provide security for you and any loved ones who depend on you financially. Having disability insurance means being able to buy food, pay bills, and meet other financial needs while you get back on your feet. It can help you endure the negative financial impact caused by a prolonged injury or illness without depleting your hard-earned savings. This makes it an essential component of financial health for members of today’s workforce.

Every disability insurance policy will state:

  • A premium amount — how much you will pay each month.
  • A benefit amount — how much you will receive in benefits.
  • A benefit period — how long your benefits will last.
  • Elimination period — how long until benefits kick in after a disability.
  • Definition of disability — how the policy defines disability.

If you experience a condition that meets your policy’s definition of disability, you will then receive the benefit amount for the length of your benefit period.

Short Term vs. Long Term Disability Insurance

The two main types of disability insurance coverage are short term and long term. It’s important to understand the following key differences between the two when seeking out coverage:

  • What injuries and illnesses they cover.
  • How long you can receive disability benefits for.
  • How long you have to wait following a disabling event to receive benefits.

Short term disability insurance is best for temporary, less serious injuries and illnesses. It is ideal for disabling events that may limit the ability to work, but people generally recover from, such as a broken wrist or maternity leave for pregnancy. Typically, short term disability policies feature a three-month benefit period and a 14-day waiting period.

On the other hand, long term disability insurance covers serious injuries and illnesses that keep you out of work for several months, years, or even permanently. Serious illnesses, such as cancer and heart disease, and musculoskeletal disorders, such as arthritis and back pain, account for the vast majority of long-term disability claims. Typically, long term disability policies feature a five-year benefit period and a 90-day waiting period.

Group vs. Individual Disability Insurance

There are two main ways to protect your income with disability insurance:

  • As part of a group, most commonly your employer.
  • Individually through a private insurer.

While group coverage is inexpensive and nice to have, it’s rarely enough by itself. Group disability insurance plans typically place a cap on benefits. This is troublesome for higher-income earners since benefits are cut off at a certain dollar amount. Group disability coverage uses your base salary, which means it does not account for commissions or bonuses earned and benefits are taxed. Leaving your employer also means losing your coverage. And even if you stay, your employer can decide to cancel the plan.

An individual disability insurance policy is a personalized plan from a private insurance company that protects you and your source of income from injury and illness. Individual disability insurance allows you to select a higher benefit amount based on your total net income. Premiums are paid with after-tax dollars, so any benefits you receive will not be taxed. Individual policies are also portable, which means you will not lose coverage if you switch employers. Your coverage will go wherever you go.

The Cost of Disability Insurance

How much you will need to pay for disability insurance coverage depends on a number of personal factors, such as your age, gender, health history, and job occupation. The policy choices you make, including the benefit amount, benefit period, waiting period, and any optional riders you select, will also impact disability insurance cost.

That being said, the average cost of disability insurance is typically between 1 percent and 4 percent of your annual income. Another estimation is that you can expect to pay between 2 percent and 6 percent of your policy’s monthly benefit amount in premium. However, it’s possible that your price tag falls outside of these ranges.

To assess your disability insurance needs, ask yourself: How long could I last without receiving a paycheck? Take inventory of your monthly obligations, necessities, and investing activities, and consider the size of your emergency fund as well. Then run a quick, online disability insurance quote to check your rates with Breeze. If you like what you see, you can apply for coverage right there on the spot.