While we often do a good job of protecting our assets, when it comes to protecting ourselves, we may not be doing as much as we could. When we consider insurance to protect ourselves, life insurance tends to be the first thing that comes to mind. Death is a certainty for all of us, so we take the necessary precautions to make sure our loved ones will be taken care of if we suddenly pass.
Many people make sure they have adequate life insurance but don’t ensure they have enough disability insurance. The assumption is that the odds of becoming disabled are so remote, buying additional disability insurance isn’t worth the cost. But the fact is, more than a quarter of all adults in the U.S have some type of disability.
Disability insurance is often not seen to be as important as life insurance, yet a serious disability may be worse financially than death. If you are disabled and unable to work, your income will decrease, yet medical bills may cause your expenses to rise.
Does My Group Insurance Policy Provide Enough Disability Coverage?
Many employers offer disability insurance to their employees, but these group plans tend to cap benefits in the range of 50–60% of your salary. Plus, benefits will often have a maximum monthly cap.
For example, your group policy may cover 60% of your salary with a maximum benefit of $4,000 per month. If you have a monthly salary of $9,000, 60% of your salary would be $5,400. However, since the group plan has a maximum benefit of $4,000, you’ll receive $1,400 less each month than you may have anticipated. Additionally, if your premium is paid with pre-tax dollars, you’ll be subject to income tax on the benefits you receive, meaning you may actually receive much less than 60% of your salary.
Some group plans will only use your base salary to calculate benefits. This means workers who make a large portion of their income from bonuses or commissions may receive benefits that are far smaller than their typical monthly income.
What Should I Look for in a Disability Insurance Policy?
If you believe you need more disability coverage, here are some important things to look for in a policy:
1. Waiting Period
The waiting period is the time between when you make a claim and when you begin receiving benefits. The longer the waiting period, the lower your premium will be. If you have a strong emergency fund, you can afford to have a longer waiting period before you receive benefits.
2. Own-Occupation Coverage
Some disability plans will pay reduced benefits (or possibly none at all) if you are able to work in any profession, regardless of how different that profession may be from your current profession. Own-occupation coverage will pay benefits as long as you can’t perform the occupation you are engaged in at the time of the accident. This is especially important for people with specialized skills, such as a surgeon or an athlete.
3. Length of Quote
Long-term policies can last for a window of five to ten years or until you reach a specific age. Policies that last until you reach a certain age will be more expensive than those with shorter time spans, but they will offer more security.
4. Non-Cancelable and Guaranteed Renewable Policies
A non-cancelable policy means your premium won’t increase. A guaranteed renewable policy means your policy can’t be canceled or modified without your consent. Both are reliant on you paying the premium on time. Guarantees are based on the claims-paying ability of the issuing company.
5. Cost of Living Rider
Some plans won’t increase the benefits you receive due to inflation. If you are young and have a long-term plan, this rider can help preserve the value of your policy. Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policyholder should review their contract carefully before purchasing.
Is Disability Insurance Right for Me?
The importance of disability insurance is often understated. Yet when the need arises, if you don't have proper coverage, you may lack the necessary income to pay your bills while being unable to generate additional income. There isn’t one type of policy that is necessarily the best, so speak with a financial advisor about your specific situation, as they can help you determine whether you need more coverage and what provisions you should look for in a policy.
This material contains only general descriptions and is not a solicitation to sell any insurance product or any security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intending to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice, you should consult an insurance professional. You may also visit your state’s insurance department for more information.
CFP®, CRPC®, Series 65 Advisory Registration Kimberly’s problem-solving nature is an asset in working with clients to assess their long-term planning needs and make recommendations to simplify their financial life. She enjoys sharing her knowledge through speaking opportunities and gives back to her community by serving as an officer on the Board of Directors for Daemion Counseling Center. In her free time, Kimberly enjoys yoga, travel and spending time in the garden. She lives...Read More