Disability Insurance – How it Works/What it Costs
If you were in an accident or suffered an illness that made work impossible for you, would you be able to cover your daily living expenses for an extended period of time without a weekly paycheck? Not many people could go months without work and stay financially stable. While no one wants to think about being seriously injured or ill, it can happen, and you should have a safety net in case it happens to you. That’s why disability insurance exists. We’ve got some information on how disability insurance works, what it can cover, how much disability insurance you need, and more.
How does disability insurance work?
If you become physically unable to work while covered by disability insurance, then you’ll receive a monthly benefit from your insurer that generally doesn’t exceed 60% of your usual income. There are short-term disability and long-term disability policies.
Disability insurance policies have a monthly premium, a waiting period, and a maximum benefit period. The premium, like with other insurance policies, is the monthly fee you pay to remain covered. If you pay your premium with after-tax money, then you won’t have to pay taxes on your disability benefit. If you get your disability insurance through an employer, you’ll likely have to pay taxes on your disability benefit.
The waiting period is the amount of time that the insurance company will wait after you file your claim to begin paying benefits to you. This can range from 30 days to 700 days, and you can negotiate this with your insurer based on what’s best for your situation.
Finally, the maximum benefit period is the period that your insurer will pay you benefits for. If the maximum benefit period has expired, the insurance company will no longer pay benefits even if you’re still unable to work.
Short-term vs. long-term disability insurance
Choosing between short-term and long-term disability insurance comes down to your current needs and what you may need in the future. There are a few factors that affect whether a long-term or a short-term policy makes the most sense for you.
Short-term disability insurance
Short-term disability insurance is usually offered by employers, but there may be better plans for you through other insurance providers. Short-term disability insurance will cover you anywhere from a few months up to a year.
Before buying a short-term policy, consider a few things.
Do you have an adequate emergency fund? You should calculate how much in savings you would need to live for three months without income. Once you’ve calculated the essentials, then factor in probable medical costs and check again. Unless you have more than enough for daily living expenses during that time, you’ll want some kind of insurance.
On the other hand, consider how much you would spend on monthly premiums for disability insurance. If it’s enough money to take away from money you would save in an emergency fund, you may be better off putting what you would spend on a premium directly into your emergency fund instead.
Long-term disability insurance
Long-term disability insurance is more commonly purchased than short-term insurance, and often through an individual’s employer. Before you buy disability insurance through your insurance, though, remember that your policy will be dropped as soon as you are no longer employed at that job. Long-term policies pay out benefits over multiple years but can take a few months to start paying out.
Consider these things before buying long-term disability insurance.
Since long-term plans can take months to start paying out, it’s important to know how long your emergency fund could sustain you so that you know how long to make the waiting period on your policy.
If you’re deciding between buying the long-term policy or not buying insurance at all, think about if your emergency fund could sustain you for over a year. With a serious incident, you could be out of work for that long. Also, look at premiums to make sure that this is a policy you can afford to pay for.
How much disability coverage should you get?
This depends entirely on what you think you’ll need and what you can afford. Except for occupations like doctors, most people are maxed out at a benefit that’s 60% of their income, that’s all the insurance companies will pay. However, you may be able to get by on less than that. If you can deal with a lower benefit amount, then you’ll pay less per month in premiums.
Plan IV | Disability Insurance & More
Becoming unable to work due to an accident or illness is a scary, isolating circumstance that no one should have to deal with. You may feel alone in this struggle but know that Plan IV is always here for you. We can set you up with quality disability insurance so that you don’t get left stranded without income as a result of an unfortunate accident. Take a look at our disability insurance offerings to see what we can do for you.
To learn more about how Plan IV can help you, or to find out more about disability insurance, feel free to give us a call at (248) 689-4910 or send in an online contact form to have all your questions answered.