Do You Need Disability Insurance?

Posted by on December 15, 2019 in Economy, Loans and Frugal Living with 0 Comments

One out of four people in the U.S. workforce will suffer a disability keeping them out of work before they are 65!  That's ONE out of FOUR!

What can YOU do to protect yourself?  

Listen to this Aspire To Money episode on Social Security and disability insurance.

Workers can receive Social Security disability insurance, called SSDI, from the Social Security Administration if they become disabled before they turn 65.

However, SSDI is very difficult to qualify for.  Nearly 65% of initial claims are denied.  SSDI requires you to be TOTALLY disabled. Even if you successfully appeal a denial, it can take nearly TWO years to start receiving benefits!  Keep in mind that the average monthly payment under SSDI is only $1,200 and may be taxed.

Five states also withhold money from your paycheck for state disability insurance programs, which differ widely.  Those states are: California, Hawaii, New Jersey, New York, and Rhode Island.

What can you do to have a better safety net than relying solely on SSDI?  

Well, many workers can get a short term disability policy through their employer. Short term disability provides a maximum benefit period of no longer than two years. It replaces half to two-thirds of your income.

Even if your employer doesn't provide you an option to buy a short term policy, you can also purchase these policies yourself. These policies have two different protection features that are important to understand.

First, you should get a policy that is noncancelable.  This means the policy cannot be canceled by the insurance company, except if you fail to pay your premiums.

Second, you should get a policy that is guaranteed renewable.  This means you have the right to renew the policy with the same benefits and the insurance company cannot cancel it.

While short term disability can be a big help, the average disability outlasts the short term policy.  How can YOU protect yourself?  This is where long term disability insurance comes in.

Without long term coverage, workers may deplete their savings and not be able to keep up with day to day expenses.

Many workers have mortgage payments and student loan obligations that continue even when income isn't coming in. Long term disability insurance typically covers up to 60% of the gross income of the disabled person.  It kicks after in six months or more of disability, and stops at the age the person would be eligible for retirement.

Just as with a short term disability policy, you can purchase long term disability from either your employer in some cases or an insurance company.

If you purchase through your employer, pick the option that allows your disability payments to be tax-free.  This choice will usually mean that your deduction is not tax deductible up front, but this will save you A LOT of money if you ever become disabled.

You can also purchase long term disability through an insurance company.  Make sure you have a non-cancelable and guaranteed renewable policy. There are other options that you may also want to add to your policy.  One important option is to choose a cost of living adjustment so that your benefits are indexed to the Consumer Price Index.

Another option is to choose a partial disability rider.  This option allows you to return to work part-time, and still receive a partial disability payment if you are partially disabled. A third useful option is to choose a waiver of premium provision.  This means that you do not have to pay premiums for the policy after you're disabled for 90 days.

So what does disability insurance cost?  

The average cost of disability insurance, whether short term or long term is typically 1-3% of your annual gross income. Costs will increase as you get older, or if you are in a high risk job. It is best to apply when you are young and healthy.

If you have sufficient savings to support yourself for two years, then you may wish to forego the cost of short term disability insurance and only spend on long term disability insurance.

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