When Valerie fell down the staircase at her son’s school she knew she was in pain. What she didn’t know is that she broke her hip…and that the recovery would mean she would be out of work for 12 weeks.
If you became ill or temporarily disabled and could not work, could you be able to pay your bills? What if you were permanently disabled and not able to return to your job or even to work at all?
According to the American Council of Life Insurers, nearly one-third of all Americans will suffer a serious disability between the ages of 35 and 65 and a person age 35 is six times more likely to become disabled than die before reaching the age of 65. In a 2005 study, researchers from Harvard Medical and Harvard Law Schools found that nearly 50 percent of all personal bankruptcies are caused by medical bills and illness-related expenses.
Disability insurance can provide a financial buffer when you are unable to work due to a disability. There are two forms of disability insurance: short-term and long-term insurance. Both are independent, meaning that you can purchase one or the other, or both.
- Short-term disability insurance. This type of insurance provides a partial replacement of your income for a short period of time – typically two to 26 weeks.
- Long-term disability insurance. This type of insurance provides a partial replacement of your income for an extended period of time after a significantly disabling injury or illness.
Let’s take a look at both forms of insurance and what questions to ask when considering disability insurance.
Short-Term Disability Insurance
A temporary disability can put you out of work, and without income, for a longer time then you may have savings for. Short-term disability insurance pays a percentage of your salary if you become temporarily disabled. A temporary disability is defined as a sickness or injury that causes you to be unable to work for a short period of time.
For insurance purposes, a temporary disability is not the same as an on-the-job accident; those are typically covered under worker’s compensation. It’s a good idea to check to see how much your worker’s compensation will pay out – it may not cover all of your income, and it may not pay for as long a period as you need – so you may want to consider short-term disability insurance as well. You should also check with your employer about what conditions are and are not covered.
Where You Can Obtain It
Employers often offer group short-term disability insurance to their workers. Either the employer or employee pays the premium (the amount required for the policy) depending on the organization you work for. Group short-term disability policies are usually “guaranteed issue,” meaning that you do not have to pass a medical exam to be eligible for coverage. Check with your employer to see whether short-term disability insurance is offered at your workplace.
You can also purchase individual short-term disability insurance yourself. If you are interested in individual short-term disability insurance, talk with your homeowners’ or renters’ insurance agent or a financial planner.
If you belong to an organization or professional association, check to see if they offer group disability insurance coverage to their members. It may be an easier, less expensive option than purchasing an individual policy.
What It Will Cost You
Most employers offer short-term disability insurance as an employee benefit, and many will pay the premium. If not, you will be required to pay all, or a portion of the premium (if your employer picks up the remainder). If your employer takes the premium amount out of your paycheck pre-tax, or you have it automatically deducted from your paycheck pre-tax, then your benefits will not be taxable. If, however, the premium is paid post-taxes your benefits will be taxable, meaning that you will less money in hand because you have to pay taxes on the benefits you receive.
What It Pays
Standard short-term disability policies provide you with the lesser amount of either a fixed portion of your weekly salary – usually 50, 60 or 66 and 2/3 percent – or the maximum monthly benefit amount determined by your employer or insurance provider. It’s important to know exactly how much you will receive in benefits because disability insurance is not intended to replace your full income – only a portion. And that portion may be considerably less than you imagine.
For example, let’s say you earn $2,100 a month and that your employer will pay 55% of your salary in short-term disability benefits WITH an $800 maximum monthly benefit cap. While 55% of your monthly salary is $1,155 you will only receive $800 ($355 less!) because of the benefit cap. So if you are disabled for 6 months (your employer’s maximum benefit period) at a monthly benefit amount of $800 you will earn $4,800 in 6 months while on short-term disability rather than the $12,600 you would normally earn during that same time period. That’s a difference of $7,800!
Our example highlights why it is important to be able to answer the question “How much money would I need to live for 1-6 months if I couldn’t work?” How much money have you already set aside toward that amount? Could you meet all your expenses on your savings alone? If you have a spouse and he/she can work, could you get by for that same time period on his/her income? Thinking through these questions can help you determine whether or not you have enough emergency savings to live on in the event of a disability, and whether you want to consider purchasing short-term disability insurance to replace a portion of your income if you are unable to work.
When It Pays
Short-term disability insurance benefits usually pay out for between 2 – 26 weeks. All policies have both a waiting period before you can begin collecting benefits and a maximum benefit period. Whether you are disabled due to a non-work related injury or an illness you will want to find out the process for verifying your disability (i.e. do you need a signed doctor’s evaluation?) and when you can begin receiving benefits. If you have group insurance through the organization you work for, your employer may have additional restrictions such as requiring you to first use your sick days before you can receive benefits.
Collecting benefits should not affect your ability to collect benefits again in the future if you meet eligibility requirements. If you return to work and become partially or totally disabled again due to the same cause you may be allowed to claim a “successive period of disability” and not have to meet the waiting period requirement to begin collecting benefits again. If you pay the policy’s premium, check to see if you need to continue paying the premium on the policy while you are collecting benefits.
Long-Term Disability Insurance
A long-term disability can be financially devastating. While you may be able to use personal savings to cover your expenses temporarily while not working, most people are financially unprepared to be suddenly out of work for an extended period of time, or be permanently unemployable.
When you’re thinking about disability insurance, think about the impact that losing your (or your spouse’s) salary would have on your overall family finances. If you provide 100% of your family’s salary, or if you are a single person providing 100% of your own living income, how will you manage to pay bills and meet expenses without any income if you become disabled and unable to work? If you do have someone else contributing to your income, how much are they contributing to your overall household income? For example, if you earn $35,000 and your spouse earns $25,000, your total household income is $60,000. Your salary makes up 58% of that amount. If you became disabled and unable to work, losing your salary means your household income would be more than cut in half. Do the same calculation for any other income coming into your household. What impact would losing your spouse’s income make?
It’s important to note that long-term DISABILITY insurance is NOT long-term CAREinsurance. Long-term care insurance helps people pay for assistance with daily living activities (i.e. eating, bathing, dressing) because they are unable to perform those activities themselves due to an illness, injury or old-age. Long-term disability insurance provides you with a partial replacement of your income for a specified amount of time while you are unable to work, or if you are forced to find a job paying less due to your disability.
What Disabilities are Covered
The definition of “disabled” varies widely. If you are considering purchasing long- term disability insurance, it’s important to know how a potential insurance company defines “disabled” or “disability” so you know when, and under what conditions, you are eligible to receive benefits. For example, some companies define “disabled” as being unable to continue in your current job. Others define “disabled” as being unable to work at all.
Types of Long-Term Disability Insurance Policies
There are two major types of long-term disability insurance: (1) guaranteed renewable policies, and (2) non-cancelable policies.
- Guaranteed renewable policy. With this form of long-term disability insurance, your policy is guaranteed to be renewed as long as you make your premium payments on time. However, your insurance company can increase your premium if it does so for all the other policyholders in your rating class.
- Non-cancelable policy. With this form of long-term disability insurance, your policy cannot be canceled if you pay your premiums on time AND your premium rate will not be raised AND your benefits cannot be reduced.
What It Pays
Long-term disability insurance will pay you a percentage of your salary while you are unable to work. So if you are in a job paying $50,000 a year and your long-term disability insurance policy pays 60 percent of your salary, you will receive $30,000 in benefits while disabled.
If you become able to work again, but at a job that pays less than your former job, it will likely pay the same percentage of benefits for the lower salary. For example, let’s say you are working at the same job making $50,000 and have an off-the job injury that makes it not possible for you to work. Your long-term disability insurance will pay 60 percent of your current salary. So while you are disabled it will pay you $30,000. Then, after a year, you are able to return to work, but at a job making only $30,000. That same long-term disability insurance will now pay 60 percent of the lesser income IN ADDITION TO the salary you are currently making. So you will continue to receive your $30,000 in your new job AND $18,000, making your total income $48,000.
In addition to paying salary benefits, some policies will pay for additional expenses related to your disability such as occupational therapy to help you re-enter the workforce, and childcare if your spouse must return to work because of your disability.
What It Will Cost You
You will have to pay an annual premium for long-term disability insurance coverage. If you pay the premium yourself, your disability benefits will be tax-free (meaning that you will not have to pay taxes on the insurance benefits that you receive). However if your employer pays your long-term disability insurance premium, your disability benefits will most likely be taxable.
If you are disabled for 90 days or longer and receive benefits, many policies have a “waiver of premium” clause. That means you will not have to pay the policy premium for as long as you are unable to work.
When It Won’t Pay
Most long-term disability insurance policies have conditions under which it will NOT pay benefits. Examples include when the disability is the result of an attempted crime, suicide, drug abuse or war. Some policies will not allow for pre-existing conditions or disability due to an elective procedure (such as cosmetic surgery), so make sure you know what conditions are and are not approved for coverage are outlined in your policy.
When It Pays & For How Long
Most long-term disability insurance policies have a waiting period before they begin paying out benefits. The standard waiting period is 90 days, meaning it will begin paying benefits 90 days after you have been verified as disabled and unable to work. If you have short-term disability insurance, then your long-term disability policy would kick in when your short-term benefits expire, usually after being out of work for between one and six months. Plans vary widely in their waiting periods, and some plans allow you to choose a longer waiting period for a lower premium (meaning you have to pay less for the policy if you’re willing to wait longer to receive benefits).
All long-term disability insurance policies will pay a percentage of your salary – typically 50, 60, or 66 2/3 percent – for a specified period of time. You get to choose how long you want to receive benefits – typically the choices are for two years, five years or until age 65.
Where You Can Obtain It
You may be able to purchase long-term group disability insurance through your job. If your employer does not offer long-term disability insurance, or if you don’t think that the plan offers you adequate benefits, you may want to consider purchasing an individual policy. Individual plans are typically more expensive than group plans and you will have to take a medical exam to be eligible for coverage. You can purchase individual long-term disability policies through companies online, through life insurance agents or a life insurance company—or you can talk with a certified financial planner for recommendations.
If you are a member of an organization or professional association outside of, or affiliated with your job, you might want to check to see if they offer group disability insurance options.
Before rushing to make a choice, and a commitment, about disability insurance spend some time shopping around to compare coverage differences and prices. Your job will, in large part, also affect what kind of coverage you can get and how much it will cost. For example, people in high-risk jobs, such as construction, may find it very difficult, and very expensive, to obtain coverage. Keep looking and ask your employer, or any associations or organizations to which you belong, if they offer disability insurance discounts for members.
How Much Coverage to Consider
When you purchase long-term disability insurance you choose to receive a percentage of your income for a designated amount of time in the event that you are unable to work. So how much of your current income will you need to live on? What percentage of your current income would you need to continue receiving to pay bills and maintain your standard of living if you could not work?
Most insurance experts will recommend that you get enough coverage to receive 60%, or, ideally, 80% of your current income in long-term disability benefits. When thinking about your income needs, try to imagine how being disabled would affect your lifestyle and budget. For example, if you were unable to work, you would no longer have work-related travel costs. However, you might have increased medical costs.
To begin estimating how much of your income you may need if you were to become disabled, take a look at your current budget. See how much you currently spend. Then tally up how much income you would have if you were to become disabled. Then subtract your expenses from income, put it in a percentage format and you’ll have the percentage maximum amount of disability coverage that you will likely want to purchase.
Additional Coverage Options
In addition to standard long-term disability benefits, you may have the option to purchase “riders” which offer additional benefits such as:
- Cost of Living Adjustment (COLA) – After you have been disabled for one year, this rider provides an annual increase in your monthly benefits (between 4 and 10 percent) to help offset inflation.
- Future Purchase Option – This benefit enables you to purchase additional coverage without proof of medical insurability.
- Residual Benefit – This benefit pays a portion of your monthly disability benefit if you are unable to resume your full responsibilities at your current job due to your disability.
Short-Term and Long-Term Disability Insurance Benefits
One common reason that many people give for not purchasing disability insurance is that they believe they will receive benefits under the Social Security Disability Income (SSDI) program administered by the Social Security Administration (SSA). It is important to realize that private disability insurance (obtained either through a group plan or on your own as an individual plan) is distinctly different than SSDI, and that even IF you are approved for SSDI payments, receiving benefits can be a long process. Between 50 and 70 percent of all claims are initially denied, meaning that those applying for funds are not approved and then have to file an appeal which can take up to 18 months to process. Of those applicants that are initially denied, only 20 percent are approved after appeal. And even if you are approved for SSDI it can take a significant amount of time to get funds, and those funds are typically substantially less than you may have anticipated receiving.
SSDI is an insurance program for disabled people who have worked previously and paid federal income taxes for a certain amount of time. SSDI benefit payments vary depending on your age and earnings history and there is a 5-month waiting period before you can begin collecting benefits. If you receive a small SSDI benefit you may also be eligible for Supplemental Security Income (SSI) benefits in addition to your SSDI benefits. As an SSDI beneficiary you are allowed to receive additional unearned income such as benefit payments from a short-term or long-term disability plan. In order to get an idea of whether or not you would qualify for SSDI answer the following questions:
- Are you working? If you are and your earnings average more than $780 a month, you generally cannot be considered disabled.
- Is your condition severe? Your impairments must interfere with basic work-related activities for your claim to be considered.
- Is your condition found in the list of disabling impairments? Social Security maintains a list of impairments which are so severe they automatically mean you are disabled. If your condition is not on the list, Social Security must decide if it is of equal severity, and if so, the claim is approved.
- Can you do the work you did previously? If your condition is severe but not on the automatically-qualified impairment list, Social Security will determine if it interferes with your ability to do the work you did in the last 15 years. If it does not, your claim is denied. If it does, further consideration is given.
- Can you do any other type of work? If you cannot do the type of work you did in the last 15 years, Social Security will determine if you can do any other type of work given your age, education, past work experience, and transferable skills. If you cannot do any other type of work, your claim is approved. If you can, your claim will be denied.
In order to qualify for SSDI benefits you will need to complete an application and provide required documents (I.D., social security card, diagnosis from physician affirming your inability to work, a W-2 for your last year, or 1040 income tax return and your last pay stub for all jobs in the current year you are applying.) It can take between 3 and 6 months for an application to be reviewed.
The Social Security Administration has a Trial Work Program (TWP) that allows you to return to work for 9 months within 5 years of collecting SSDI to see if you are able to perform sustained work. If you meet, and abide by, the TWP program requirements you may earn both your salary and receive your full SSDI benefit payment. At the end of the TWP you will have to decide whether or not you want to begin working full-time or collect your full SSDI benefits.
Questions to Ask When Considering Disability Insurance
Whether you are evaluating a short or long-term disability insurance policy offered through your employer or purchasing an individual plan through an insurance company or agent, consider asking the following questions before making a commitment:
- How do you define disabled? In other words, when am I eligible to receive benefits?
- What is the process to file a claim and begin receiving benefits?
- If my claim is denied what is the appeal process?
- Do you require that I be under direct and constant physician care during my disability?
- Do you require that I not work at all while I am collecting benefits?
- Do you pay out partial benefits if I lose a portion of my income due to a disability?
- Will you pay, and if so how much, for occupational therapy?
- What types of disabilities would disqualify me for benefits?
- Do you cover people with pre-existing conditions?
- What choices do I have about the maximum amount of time that I can receive benefits?
- What type of riders do you offer with the policy?
- Is this a “non-cancelable” or “guaranteed renewable” policy?
- What is the premium for this policy?
- Will my employer, or I, pay the premium before or after taxes?
- Can I voluntarily elect to have federal taxes deducted from my benefit checks or am I responsible for paying them myself?
- What happens if I am not able to make my policy premium on time? Will it be automatically cancelled or can I work out a payment schedule to maintain coverage?
- Do you require that I work a certain number of hours while I am NOT collecting benefits in order to maintain coverage?
- What happens to the waiting period if I am able to, and elect, to return to work early from a disability and then apply again in the future for benefits if I am unable to work? Will the days I returned to work early count toward my waiting period?
- If this is an employer-sponsored plan and I am laid off or take a leave of absence what would happen to my coverage?
- Am I eligible to maintain coverage if I retire?
- If I become disabled and begin collecting benefits, will I still need to pay the premium to maintain coverage?
- Is there a maximum cap on the benefits I can collect under this policy?
- Is there an income cap on this policy?
- How will receiving disability benefits under this policy affect my Social Security, workman’s compensation or unemployment benefits?
- Will my benefit amount adjust for inflation?
- Does this policy offer any work incentive benefits such as an increase in benefits for participating in an approved rehabilitation program?
- How long has your company been in business? How many clients do you provide insurance for and do you have testimonials as to their satisfaction with your company’s service? (You may work with this company for a long time so you want to know that it is established, well-run and will be in business for the long run.)
Remember to get a copy of the plan’s provision in writing and have a contact name and phone number in case you have a question in the future about your policy.