Your most valuable asset isn’t your house, car or retirement account. It’s the ability to make a living.
Disability insurance pays a portion of your income if you can’t work for an extended period because of an illness or injury.
“Everybody who relies on a paycheck should have this coverage,” says Griffin Kirsch, the CEO of GK Insurance Group.
Why you need disability insurance
The chance of missing months or years of work because of an injury or illness may seem remote, especially if you’re young and healthy and you work at a desk.
But more than one in four 20-year-olds will experience a disability for 90 days or more before they reach 67, according to the Social Security Administration.
You never think it’s going to be you – which the optimistic bias almost everyone has. But what if it is?
More than one in four 20-year-olds will experience a disability for 90 days or more before they reach 67. One reason people shrug off the risk is they think about worst-case scenarios, such as spinal cord injuries leading to quadriplegia or horrific accidents that result in amputation, but back injuries, cancer, heart attacks, diabetes and other illnesses lead to MOST disability claims.
Buying your own disability policy
Consider buying a policy if you don’t have any or enough disability coverage at work or are self-employed. Employer-sponsored disability insurance usually pays only a portion of your base salary, up to a cap. It’s a good idea to supplement that coverage if your salary far exceeds the cap or you depend on bonuses or commissions.
An insurer will consider other sources of disability insurance to determine how much coverage you can buy. Generally, you can’t replace more than 75% of your income from all the coverage combined.
Buying your own policy lets you:
• Customize the coverage with extra features, such as annual cost-of-living adjustments
• Choose the insurance company with the best offerings
• Keep the coverage when you change jobs. Employer-paid coverage ends when you leave the company. (You might be able to take the coverage if you pay the full premium for disability insurance offered through the workplace.)
• Control the disability insurance. The coverage stays intact as long as you pay for it. But employer-sponsored coverage will end if the employer decides to stop providing disability benefits.
• Collect benefits tax-free if you become disabled. If the employer pays for the coverage, you must pay taxes on the benefits.
The annual price for a long-term disability insurance policy generally ranges from 1% to 3% of your annual income, according to the Council for Disability Awareness. A variety of factors affect the cost.
• Your age and health: You’ll pay more the older you are and the more health problems you have
• Your gender: Women usually pay more because they tend to file more claims
• Whether you smoke: You pay less if you don’t smoke
• Your occupation: You’ll pay more if you work in a job with a high risk of injuries
• The definition of disability: The broader the definition of disability, the higher the premium. A policy that covers you if you can’t work in your own occupation but could earn income in a lower-paying job will cost more than a policy that covers you only if you can’t work at all.
• Length of waiting period: This is known as the elimination period. You can reduce the premium by increasing the waiting period before benefits kick in.
• Your income: The more income you have to protect, the more you’ll pay for coverage
• Length of benefits: The longer the period that the policy promises to pay out if you become disabled, the more you’ll pay in premiums
• Extra features: Additional features, such as cost-of-living adjustments to protect against inflation, will increase the premium