Is it really worth it? I’m in my prime. That won’t happen to me.
These are just a few of the initial thoughts that may come to mind when you think about disability insurance — especially if you’re in your 20s or 30s. Yet the numbers paint a different picture about the need for this type of coverage.
A recent study found 56% of Americans were living paycheck-to-paycheck during the COVID-19 pandemic. Unable to miss a paycheck, what would happen if an unexpected injury or illness left you unable to work? Because the truth is, one-in-four Americans will experience this for at least a year at some point in their working lives. And the financial impact can be devastating.
So the answer, more likely than not, is: Yes, you do need to buy disability insurance, even if you’re young and healthy. With this in mind, let’s take a closer look at how disability insurance works and the different types of coverage that are available.
How disability insurance works
Disability insurance is designed to protect your greatest asset — the ability to earn an income. Also known as income protection insurance, this type of coverage replaces a portion of your monthly earnings if you become too sick or hurt to work. The disability insurance benefits you receive can be used to pay the bills, put food on the table, and provide for your loved ones. That way, you can continue to meet your financial obligations while you’re out of work and, instead, focus on what matters most — your recovery.
The price of disability insurance depends on a number of personal factors, including your age, gender, health history, and job occupation. How much you pay in monthly premiums is also influenced by your policy choices, such as the benefit amount, benefit period, and waiting period that you select. Ultimately, the most important takeaway when it comes to cost is that the younger and healthier you are, the more affordable it will be. That’s why it’s smart to buy early on your career so you can lock in a lower rate.
Types of disability insurance coverage
Not all disability insurance policies look alike. Rather, there are two main types of disability insurance coverage and two main ways each can be obtained.
First, the types of coverage:
- Long-term disability insurance covers serious injuries and illnesses that may prevent you from working for an extended period of time. Cancer, heart disease, musculoskeletal disorders, such as arthritis and back pain, and other serious conditions that develop over time are among the most common reasons for filing long-term disability insurance claims. Benefit payments typically kick in after a waiting period of 30, 60, 90, 180, or 365 days, and last 1, 2, 5, or 10 years, or until age 65 or 67.
- Short-term disability insurance, on the other hand, covers temporary conditions that people generally recover from and are able to return to work in a few weeks or months. Think of a broken wrist or a sprained ankle from a slip and fall. It’s also important to note that most short-term disability insurance policies cover healthy pregnancies and maternity leave. Benefit payments typically kick in after a waiting period of 7, 14, or 30 days, and last 3, 6, or 12 months.
Long-term and short-term disability insurance coverage can be obtained individually, as a part of a group, or both.
- Group disability insurance is a plan you can participate in if it is offered through your employer or any other association or organization you may be a part of. This is a convenient and affordable way to get coverage, as you can typically opt-in to the plan at little to no cost. But it has significant limitations. Benefits are capped at a set amount, regardless of how much you earn, and they do not account for earnings from commissions or bonuses. Coverage is also contingent upon your employment, which means if you switch companies, you lose your income protection.
- Individual disability insurance is personal coverage you can purchase from a private insurance company. You own the policy, so you pay the full premium amount each month. Of course, you get what you pay for — the maximum amount of income protection available. Disability insurance plans for individuals can be customized to cover a higher percentage of your total net income. You can also add optional benefits, called riders, to enhance your coverage. Perhaps the most important part of your personal policy is its portability. Your individual disability insurance policy goes wherever you go, no matter how many times you switch employers.
Now that you have a better idea of how disability insurance works and what types of coverage are available, you’re probably wondering where you should go to get covered.
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While coverage can be obtained through work if your employer offers it, group disability insurance is not available to everyone. It’s also not as reliable, since coverage is contingent upon your employment. That’s why it makes the most financial sense to purchase an individual disability insurance policy that you own. This coverage is personal and portable — and usually pretty affordable, too. Better yet, buying young allows you to lock in lower rates, saving you money in the long run.