Disability insurance helps individuals replace lost income stemming from their becoming disabled and unable to work. This type of insurance can be provided by the government, subsidized by your employer, or purchased individually.
Types of Disability Insurance
According to USA.gov, there are two main types of disability insurance: short term and long term. Both types provide the same coverage, but last for different lengths of time and have different purposes.
- Short-term disability insurance: This type of insurance typically provides coverage for up to two years. It is designed to protect policy holders against a disability from which they expect to recover in a relatively short time.
- Long-term disability insurance: Coverage under this type of insurance can last a lifetime. It is designed for individuals who are permanently disabled and will never be able to work again.
A third option are the Social Security and Supplemental Security Income programs administered by the Social Security Administration.
- Social Security Disability Insurance (SSDI): Benefits under this program are given to those individuals who have worked the required length of time and paid Social Security taxes.
- Supplemental Security Income (SSI): SSI is funded by general federal tax revenues. It is intended to assist blind, disabled or elderly individuals who have little or no income, and does not require having made prior payments into the system.
To obtain benefits under either program you must be deemed eligible. Qualification requires providing medical records, evidence of income, and proof of disability.
Determining If You Need Disability Insurance
Predicting your chances of becoming disabled is difficult, which makes determining if you need disability insurance a complex task. Take the advice of Frank Darras, a nationally recognized lawyer: "Every working American should have disability insurance. It doesn't matter whether you are young and single, middle aged and married or married at any age with kids. If a serious injury or illness prevented you from working how would you would meet your basic living expenses, let alone plan for your financial future? And the risk of disability is real." Deciding whether purchasing disability insurance is the right move for you can be broken into a four step process:
- Risk analysis: Does your job place you at a high risk for becoming disabled on a regular basis? For example, individuals who work in construction might be at a higher risk than those who work in an office.
- Health analysis: How is your general health? Do you suffer from chronic or regularly recurring illnesses that cause you to periodically miss work? Are any illnesses or injuries from which you suffer expected to grow worse in the future? Have you been told that any of your medical conditions are incurable? These factors may increase your chances of becoming permanently disabled in the future.
- Your leave benefits: Does your work benefits package offer a large number of sick and leave days that you can take to care for your health with no repercussions? If so, you may find that these days are adequate to properly take care of your health.
- Your financial situation: Are you the sole income earner in your household? How many family members depend on that income? Do you have a large amount of savings? Individuals with a sizable number of dependents and small savings account may find that disability insurance offers them ease-of-mind about becoming unable to work.
An answer of "yes" to any of these questions might indicate that it's suitable for you to purchase disability insurance.
Short- and long-term disability policies are offered by independent insurance companies and available for individual purchase. However, some employers also offer these policies as part of their benefits package.
Choosing a Policy
Standard and Poor ranks insurance companies based on their financial strength. Ratings range from very stable, at an AAA, to unstable, at a D. These rankings, which can also be found on Insure.com, are indicative of an insurance company's ability to pay on their financial obligations, which, in turn, indicates their reliability as a company.
Companies with high ratings that offer disability insurance policies include:
- Mutual of Omaha: This company offers both short- and long-term policies. One of the company's short-term disability policies has no waiting period, providing coverage from the day of the accident. Coverage under the company's policies are guaranteed until age 67 if all premiums are paid. This company was ranked an A+.
- State Farm Insurance: This insurer allows their policies to be crafted according to each purchaser's needs. Its disability insurance benefits include payment of monthly income for up to six months and payment for the cost of participation in any rehabilitation program while injured. State Farm was ranked an AA.
- MetLife Insurance: This company's policies provide monthly benefits through the policy coverage period, which varies in each policy. Policies can also be made non-cancellable or to have guaranteed renewals. It was ranked an A-.
Considerations When Purchasing a Policy
Purchasing any insurance policy requires investigating both the policy and your goals. USA.gov provides hints on what to consider when purchasing a disability insurance policy:
- The insurer's definition of disability: Some companies define "disabled" as you being unable to perform the tasks required of your current or typical job, while others consider you disabled only if you are unable to perform any job.
- The length of benefits: The length of time during which policies will pay benefits differ.
- The amount of benefits: The actual dollar amount of benefits you receive may be affected by your receiving SSDI or other types of benefit payments, such as worker's compensation.
- The waiting period: How long do you have to wait before you can obtain benefits? What must you prove before benefits will be awarded? Longer waiting periods put you at increased risk of running out of savings before benefits arrive.
Frank's advice, "Always buy as much individual disability insurance as your income will support. If your employer offers group disability insurance, apply for the individual coverage before you put the group coverage in place as this will allow you to maximize your non-taxable benefits and preserve all of your state's consumer remedies. If you already have employer sponsored group coverage, apply for as much individual coverage as possible and be sure to include a future increase option to protect you in the event you leave your employer and the group coverage terminates."
Purchasing a Policy
A disability insurance policy can protect you and your family against the unknown. Frank recommends, "Always purchase Noncancelable, Guaranteed Renewable coverage. These features mean the insurance company can't cancel your policy, increase your premiums, or change the contract language, as long as you pay your premiums on time." Whether you need a policy and what type of policy best suits your needs is determined by your circumstances. Thoroughly investigate each policy prior to choosing one to ensure it is affordable and provides the protection you need.