Disability Insurance - Who Needs It?

Disability insurance generally provides an income benefit if you can’t work because of an illness or injury. You may think this won’t happen to you, but, according to the Council for Disability Awareness, one in four 20-year-olds will become disabled before they retire. Back injuries, cancer, heart disease, and other illnesses are responsible for the majority of long-term absences.

Benefits for How Long?

Disability insurance falls into two categories. Short-term disability typically replaces 60%- 70% of your salary from a few months to up to two years. It requires a brief waiting period before benefits start.

Long-term disability typically replaces 40%-60% of your salary for as long as you’re disabled or until you reach retirement age. A common waiting period before benefits begin is 90 days, but you have the option of choosing a shorter or longer time.
Some employers offer disability insurance as an employee benefit. If your employer doesn’t offer coverage (or the coverage is limited) or if you’re self-employed, buying long-term disability insurance is a smart move. Having your own policy also allows you to keep your coverage even if you change jobs.

The Definition of Disabled

The definition of disabled varies depending on the policy. Some policies pay benefits only if you can’t work at any job for which you’re qualified. Other policies pay if you can’t perform the duties of your own occupation. A policy may pay partial benefits if you’re able to work part time.

Looking at Cost

The cost for a policy is typically one to three percent of your annual income. Factors that determine the cost include your age when you buy a policy, your health, the definition of disability, length of the waiting period, and the length of time benefits will last. You may be able to customize a policy with extra features, such as annual cost-of-living adjustments. However, adding features will increase the price.

Other Income Sources

When determining how much of your salary you would need to replace, consider other potential sources of income for which you might be eligible, such as employer-provided sick pay, Social Security Disability Income (SSDI), or workers’ compensation (for job-related illness or injury).