Disability Insurance Guide

Last Updated: September 2020

Have you given much thought to how you’ll pay your bills if you become disabled and can’t work for an extended period of time?

Most people don’t – or at least they don’t give it enough thought.

This is where disability insurance is important.

Most people don’t think about it in the way they do with other types of insurance, like auto and health.

But getting the right disability insurance quotes – and the right policy – before a disabling event occurs is really one of the most important strategies to protect both your family and your finances.

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How Important is Disability Insurance?

The Council for Disability Awareness reports the following disturbing statistics:

• More than one in four of today’s 20-year-olds can expect to be out of work for at least one year due to disability before reaching normal retirement age.
• Contrary to popular belief, injuries are not the primary cause, accounting for just 9% of long-term disability events. Much more common are musculoskeletal disorders, cancer, pregnancy, and mental health issues, including depression and anxiety.
• 51 million working adults have no disability insurance.
• 48% of American adults don’t have enough savings to cover at least three months of living expenses.
• Long-term disability is a leading cause of bankruptcy filings.

The takeaway: experiencing disability is not nearly as remote a possibility as most workers assume it to be.

Here are some sample disability insurance claims we’ve seen:

It’s also a situation that seems unlikely to happen – until it does. And once it does, the results are usually catastrophic.

At least they are if you don’t have a good disability insurance policy.

Aren’t we all covered by Social Security Disability Insurance?

Many people are at least somewhat aware that Social Security includes a provision for disability.

In fact, all eligible workers are automatically covered under Social Security Disability Insurance, better known as SSDI.

But it’s important to understand that SSDI provides only minimal coverage.

As of June 2018, the average SSDI benefit is just $1,198 per month.

That comes to only $14,376 per year, which is less than one third the median wage of $45,812 (or $881 per week for full-time workers, according to the Bureau of Labor Statistics).

So yes, Social Security does provide disability insurance.

But it obviously won’t come close to replacing the median wage typical workers earn.

What’s more, it’s not exactly easy to qualify for SSDI.

The application process can take months and require a significant amount of documentation and medical evaluation.

And approval is hardly guaranteed.

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What is Disability Insurance?

There are two basic types of disability insurance: long-term and short-term.

Long-term disability insurance is a policy that replaces lost wages due to a disabling event.

Many employers provide a group disability insurance policy for their employees.

But it’s also possible, and highly desirable, to have your own personal disability insurance policy.

A disability insurance policy will pay benefits based on a list of covered events that are included in the policy documents. The longer the list of events, the more comprehensive the coverage.

The policy will also spell out specific benefits.

• It could be based on a percentage of your regular income, ranging between 45% and 65%.
• In other cases, it’s based on a flat amount, like $3,000 per month, $4,000, $5,000, or whatever dollar amount is spelled out in the policy.
• A typical provision is a hybrid calculation, that might allow something like 60% of your regular income, up to a maximum of $5,000 per month.

Like all insurance policies, disability policies have their own version of a deductible.

It’s typically referred to as a “waiting period,” and it runs from 90 to 180 days.

For example, the policy may specify that benefits will be paid beginning three months after the disabling event, or of the medical confirmation of the disabling condition.

The longer the waiting period, the lower the insurance premium will be.

Disability policies also contain benefit terms.

For example, a policy may pay out benefits for a certain limited amount of time, say three years. But this will vary from one policy to another.

Naturally, the longer the benefit term, the higher the insurance premium will be.

Short-term Disability

Short-term disability covers events and conditions that are expected to be temporary in nature.

They will begin paying benefits within a few days of an injury or the onset of an illness or other condition.

But benefits will be limited to no more than a few months.

In a perfect world, you’ll have a long-term disability policy that will begin paying benefits after 90 days, and a short-term policy that will pay benefits up to that point.

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Do I Need Disability Insurance if I’m Covered by My Employer?

One of the most common reasons disability insurance is ignored is because it’s offered by a large number of employers.

The employee may know that she has disability coverage through work but is probably far less familiar with the details.

But here are the realities you need to be aware of if you have an employer plan:

• Employer plans are typically for short-term disability only.
• Long-term disability is rarely offered since it’s assumed the employee will apply for SSDI if a condition is long-term.
• Since the employer owns the policy, they will determine all the details within it. That includes how much you will be paid, for how long, and what disabling events qualify.

There’s one more limitation you need to be aware of: you can lose your coverage if you’re separated from your employer.

The policy will only be effective while you are employed with that company.

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Why You Need to Get Disability Insurance Quotes on a Private Plan

As you can see, employers typically provide only short-term disability, and SSDI benefits are impossibly low.

For that reason, you owe it to yourself to at least look into getting disability insurance quotes on a private policy.

With your own plan, you will have complete control over all the details in the policy. That includes the amount of the benefit, the waiting period, the length of the term benefits will be paid, and the qualifying events that will trigger a claim.

It will also mean you won’t be dependent on SSDI.

We recommend the following layered disability insurance strategy:

1. Participate in a short-term disability policy through your employer.
2. Have your own long-term disability policy in place.
3. Rely on SSDI only if your disabling event exceeds the benefit term of your private policy.

In regard to your long-term disability policy, you should have the highest monthly benefit with the longest benefit term you can afford.

The higher the benefit, the less dependent you’ll be on outside income sources while you’re disabled.

And the longer the benefit term, the less likely you’ll need to rely on the greatly reduced SSDI benefit.

In many cases, even a long-term disability event will be temporary.

If you’re unable to work for two years and your private policy has a benefit term of three years, you’ll be well covered within that plan.

Two Critical Disability Insurance Policy Provisions – Own Occupation vs. Any Occupation

This could be the single most important provision in the disability insurance policy.

It will affect the circumstances under which a policy will pay benefits, as well as the premium level.

Own Occupation. Under this provision, you are eligible for benefits if you’re unable to work in your current occupation. For example, if you’re a teacher, and unable to work in that field, the policy will pay benefits.

Any Occupation. Under this provision, you’re only eligible for benefits if you’re unable to work in any occupation. For example, if you’re a teacher and unable to work in that field due to disability, but you can work as a security guard, the policy will pay benefits. To qualify for benefits, you’ll have to be completely disabled and unable to work in any occupation.

Since the any occupation policy is less likely to pay benefits, the premiums will be lower. They’ll be higher on the own occupation policy, but that will ensure you’re able to collect benefits if you’re unable to perform the duties of your current job.

By getting disability insurance quotes, you can find out exactly what the difference in premiums will be.

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How Much Does Disability Insurance Cost?

There’s a wide range on premiums, due to the variables contained within a policy.

Generally speaking, the premium will be between 1% and 3% of the salary you need to replace.

For example, if you earn $50,000 per year, and you choose a medium level policy, the premium will be about 2% of your salary, or about $1,000 per year ($83 per month).

Various factors will affect how much you’ll pay, including:

• Own occupation or any occupation.
• The length of the waiting period – longer is cheaper, shorter is more expensive.
• The amount of the monthly benefit – the higher the percentage or dollar amount, the greater the premium.
• Benefit term – the longer the term, the higher the premium.
• Your age – as is the case with life insurance, the older you are, the higher the risk of the disabling event.
• Your occupation – some are more dangerous than others, and will result in a higher premium. A construction worker will pay a higher premium than a bank manager, due to the greater risk of injury.

The only way to know for sure what your premium would be is to work with an insurance broker and get disability insurance quotes.

You can crunch any of the policy parameters above to get to a premium level you can comfortably afford.

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Companies Offering Disability Insurance

There are hundreds of insurance companies, but not all offer disability insurance.

More specifically, not all companies offer good disability insurance.

That’s because they specialize in some other type of coverage, such as auto, life, or business insurance.

It’s important to work with insurance companies for which disability insurance is a primary line of business.

Not only will they provide the best plans, but they’ll come with more affordable rates, as well as accommodation for the many special situations that are involved with disability insurance.

A few companies we work with on a regular basis that offer disability insurance include:

• Banner Life Insurance
• Met Life
• Prudential
• Protective Life Insurance
• AIG
• Voya Financial
• Principal Financial Group
• Sagicor

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Bottom Line

Exactly where we might place a disability policy will depend upon the type of plan you need, as well as any circumstances specific to your situation.

This is one of the major advantages of working with an insurance broker rather than an individual insurance company.

If you apply for disability insurance directly with an insurance company, they can only sell you the type of coverage they have in-house.

As brokers working with dozens of different insurance companies, we can match your situation to the best provider.

When it comes to insurance, it’s never “one-size-fits-all”.

We may put your neighbor into an excellent plan with Company A, but match you up with Company B, because the plan they offer will work better in your particular situation.

Be careful when obtaining disability insurance quotes.

The lowest-priced policy available may be completely inadequate for your needs.

This is another reason why you need to work with an experienced broker.

Give us a call, or fill in the “Leave a Reply” screen below, and put our experience to work for you!