When considering their most valuable asset, many people believe that it is their home or their retirement savings. However, the truth is that in most cases, an individual's most valuable asset is his or her ability to earn an income. This is because, without this ability, none of the other assets would likely be achievable. Nor would it be possible to pay one's basic living expenses.
Imagine for a moment what it would be like if income from a job were to suddenly cease, and it was impossible to obtain employment elsewhere because of a disability. How long would it be before you would have to move to a different home and make other significant changes to your current lifestyle? Even if you have a substantial amount of savings built up – is that what you really intended that money for?
What is the Need?
Even if you are currently young and healthy, the odds of encountering an unexpected injury or illness are high. In fact, according to the Council for Disability Awareness, just over one in four of today's 20 year olds will become disabled before they reach retirement. Those are substantial odds.
There are numerous factors that can increase the risk of becoming disabled. In addition to taking part in high risk activities and behaviors, other criteria include tobacco usage, having excess body weight, substance abuse, and frequent alcohol consumption.
Today, according to the U.S. Census Bureau, more than 37 million Americans are considered to be disabled – that equates to approximately 12 percent of the country's population. Of those who are disabled in the U.S. today, more than half are between the ages of 18 and 64.
This means that disability can strike those who are young – and if it does, it is essential that you still have an income and a way of paying for your living expenses such as your rent or mortgage, your utility bills, and your food.
According to insurer Gen Re, the average individual disability claim lasts for just under 32 months. However, based on the Commissioner's Disability Tables, one in eight workers will be disabled for five or more years during their working years. What would that do to your savings – and your future?
The good news is that even in the event of an unexpected disability, there are ways of protecting yourself financially. One of the best ways of doing so is through disability insurance coverage.
Understanding How Coverage Works
Disability insurance is a type of insurance coverage that will provide a certain set amount of income to an insured who becomes unable to work because of a qualifying injury or illness. In most cases, the benefits from these types of policies are paid out on a monthly basis, and the funds can be used for paying the insured's living expenses.
With individual disability insurance policies, the premiums are usually paid with after tax dollars. Because of that, the benefits that are paid out to you are typically tax free. In addition to the income that is received from an individual disability insurance plan, benefits that may be also received at the same time from Social Security and / or other related programs will not offset the income from the disability policy to the insured. In other words, the disability insurance policy will still pay out in addition to other types of benefits that are being received.
Disability Insurance – Own Occupation versus Any Occupation Plans
When considering a disability insurance policy, it is important to understand the difference between plans that pay out based on “own occupation” or “any occupation,” as the difference between these can be significant.
A disability insurance policy that pays out based on one's “own occupation” means that the insured will receive benefits if he or she is unable to perform the duties of their current occupation.
Therefore, if the person is, for instance, a surgeon and they can no longer perform surgery based on a qualifying illness or disability, then they will still be able receive benefits – even if he or she is able to perform the duties of other types of jobs.
A disability that pays out benefits that are based on “any occupation” means that the insured must be unable to perform the duties of any job in order to obtain the policy's benefits. In this case, a policy holder who is a surgeon and who is not able to perform the duties of being a surgeon – but who is able to perform duties of other types of jobs – will not be able to receive benefits from the policy.
The Differences with Workman's Compensation
When an employee suffers an injury on the job, oftentimes their employer will compensate them through worker's compensation. It is important to understand the difference between disability insurance and worker's compensation – because the two are not the same thing.
The key difference between workers' compensation and disability insurance is that workers' compensation (or workers' comp) pays for injuries that are work related. Employers will obtain workers' comp insurance in order to pay for incidents that occur on the job.
If workers sustain injuries on the job, it is oftentimes up to the employer to pay for the person's medical bills, as well as for the individual's lost wages if the employee must take time off work because of the injury. An employee who collects payment via workers' comp will typically, however, not have a long-term disability, but rather a temporary injury from which he or she will soon return.
On the other hand, disability insurance pays for a percentage of a person's earnings if the insured is not able to work due to an injury or illness – regardless of whether that injury or accident happened at work or elsewhere. In addition, if the disability insurance policy is an individual policy (versus an employer-sponsored group plan), the insured will be covered under the policy regardless of who he or she is employed through.
According to the Council for Disability Awareness, less than 5 percent of disabling accidents and illnesses are work related. This means that the other 95 percent are not – and that these other 95 percent are also not covered by workers' compensation insurance.
What About Social Security Disability Benefits?
Unfortunately, even Social Security disability can't really be relied upon. Based on data from the United States Social Security Administration, as of December 2012, most individuals – 93 percent – of those who were receiving disability income, received less than $2,000 per month. And nearly half were actually receiving less than $1,000 per month.
It can be extremely difficult to qualify for Social Security's disability benefits, too. For example, Social Security will only pay benefits if a person is considered to be totally disabled. This means that the individual cannot do work that they did previously, nor can they do other jobs either. In addition, the person's disability must have lasted, or be expected to last, for at least one year or result in death.
An individual must also have collected enough work credits in order to qualify for Social Security disability benefits. The number of credits will be dependent on the age that the individual is when he or she becomes disabled, however, in many cases, they must have 40 credits, with 20 of those credits being earned in the past ten years, ending with the year in which they became disabled.
With that in mind, the importance of disability insurance becomes even more clear. This type of insurance can provide you with the additional funds that you need to help pay living expenses – without the need to dip into savings, retirement assets, or worse yet – use credit – for the purpose of paying day to day bills until you are back on the job.
If Social Security deems that a person's situation qualifies, there is still a five month waiting period before benefits are paid. This, too, can create a financial hardship for many people in terms of paying living expenses – especially if there are added medical costs due to the illness or injury that has been suffered.
How Much Coverage Should You Carry?
When applying for coverage, it is important to determine a proper amount of income that the policy will pay out should you become ill or injured and unable to work. There are also other factors to consider as well, such as how long you will need to wait before the benefits begin to pay out from the policy.
Therefore, when considering your choices for coverage, you will want to factor in the following:
- The amount of monthly living expenses that you typically pay. Here, you should include the amount of your rent or mortgage, as well as the amount of your utilities, the cost of your transportation (include fuel and insurance expenses), healthcare, food, household expenses (including maintenance) and other miscellaneous costs. Once you have determined the amount of your living expenses, you will be better able to come up with an amount of monthly benefit for the policy. In most cases, disability insurance policies will pay out a certain percentage – usually up to 80 percent – of your employment wages. The income from most individual plans is not taxed, however, 80 percent of your wages should provide a similar amount – or in some cases more – than you were netting while on the job.
- The length of time that you could pay your living expenses out-of-pocket before the policy begins to pay out. This length of time will help you in coming up with a proper elimination period for the policy. The elimination period is the amount of time that you must wait once your disability begins, but before the policy's benefits start to pay out. This works like a deductible. The longer your elimination period is, the lower your premium will be, and vice versa.
- How long you want the benefits to pay out. You should also consider how long you want the policy's benefits to pay out. Most policies will allow you to choose benefits payable to a certain number of years, or to pay out until you reach age 65. It is also important here to remember that, over time, inflation will likely have an effect on your living expenses. therefore, you should check to see if the policy has any type of inflation rider that can be added.
How to Obtain the Best Quotes
If you're ready to compare disability insurance policies, I have partnered with a top disability agent to help you obtain all of the information that you need. They can do so quickly, easily, and conveniently directly through your home computer without the need to meet with an insurance agent.
My agent works with the top insurance companies in the market place today, and they can help you in comparing policies, benefits, and premium quotes – and help you to find the coverage that is right for you and your specific needs.
In doing so, they can help you to determine how much coverage is appropriate for your particular situation, as well as the right deductible (elimination period) for you. In addition, they will help you in deciding how long your disability insurance benefits should last.
Because they work with many different insurance carriers, they will also help you in narrowing down which carrier can provide you with the best coverage possible for the lowest possible premium price. This can help to ensure that you are being well covered while at the same time remaining within your budget.
If you're ready to begin the process of finding the disability insurance policy that will cover your needs, all you have to do is use the form on this page. Should you find that you have any additional questions regarding disability insurance or about how to find quotes, an agent will be in touch with you shortly to make sure you are getting exactly what you need. I have partnered with the top company that will take care of you and focus on your needs not on lining the pocket of the insurance company. If you have any questions they are here to answer those questions and make sure you feel good about your policy.