My husband and I have recently been reviewing our insurance coverage to figure out exactly we need as a married couple with no kids. Last week, I shared some thoughts on health and life insurance.
One of the most frequent responses to my previous post was that we should also be thinking about disability insurance. Nobody likes to think about what life would look like should disability strike. According to the American Council of Life Insurers, however, the reality is that one-third of all Americans between the ages 35 and 65 will experience a disability lasting more than 90 days.
What is disability insurance?
Disability insurance replaces a portion of your income if you become disabled and are unable to work. While employer-backed plans are often more affordable, you tend to have more options buying private coverage. Because every policy is different, it’s important to familiarize yourself with the benefits offered by each.
For example, if you receive bonuses and commissions in addition to salary, double-check to see if your coverage is based on your base salary alone. Also make sure you know when your coverage kicks in, what percentage of your income it pays, and so on.
Short-term vs. long-term disability insurance
As you might imagine, the primary difference between short- and long-term disability insurance lies in the types of disabilities that they cover, and the length of time that they pay benefits.
Short-term disability insurance usually kicks in quickly, but only lasts for a few months. The idea is that this is a temporary condition, so benefits will end after a certain time period disclosed in the policy.
Long-term disability typically has a longer waiting period before going into effect, but also provides longer-term coverage. Thus, long-term disability insurance protects you if you suffer a devastating disability and have to stop working for an extended period of time.
What about Worker’s Compensation?
It should be noted that worker’s compensation is also a form of disability insurance, but it does not cover injuries outside of the workplace. Moreover, it doesn’t cover disabilities caused by illness. Thus, if you’re relying on worker’s compensation to provide your safety net, you’re taking a significant risk.
What about Social Security?
While the Social Security Administration offers disability benefits for you and your family, they don’t kick in for six months, and they’re not particularly generous. For example, if you are currently 30 years old, earning $60, 000 per year, and intend to retire at age 65, this calculator estimates that you’d qualify for $1860/month in benefits — that’s just a bit over $22k/year.
How much disability insurance should you get?
For your disability insurance needs, I suggest using a calculator, like this one, which can give you an objective idea of what you need. In essence, you need to figure out how much you need to cover your bills while you’re out of work. If there’s a gap between your coverage and your expenses, you’ll have to make up the difference with your savings.
Gene Meyer from Kitchentablenomics had this to say:
Look for something that covers your ability to work your own occupation (Social Security provides what’s known as “any occupation” coverage) and covers as close to 70% of your income as you can afford. (70% is the max that many carriers insure.) You will owe income taxes on any benefits you get from a policy that your employer buys, but not on anything you buy personally.
Since disability policies don’t typically replace your full salary, and they also don’t kick in right away, it’s still critical to have an emergency fund to supplement your coverage.
In the end, you have to weigh all the factors for your family. How much coverage can you comfortably afford?
My husband and I are looking at our disability insurance options, but probably won’t make a decision until the next month or so. How about you? What sort of disability coverage do you have? Employer-provided coverage? Or do you have a private policy?