Most people don’t expect to become disabled and unable to work, but unfortunately, it’s more common than people realize. Today’s 20 year old has a 25% chance of becoming disabled before they reach retirement age. With the rising cost of living and medical expenses, you may not have enough savings to cover bills if you’re out of work for months at a time.
Having disability insurance protects your finances and is just as important as having other types of insurance. If you have a life insurance policy to protect your family, you will benefit from having disability insurance.
Learn what types of disability insurance are available, the benefits and coverage they offer, and which provide the best protection for you and your family.
What is Disability Insurance?
Disability insurance also called disability income insurance, protects your ability to earn a portion of your income if you cannot work after a severe illness or injury. It pays benefits directly to you so that you can use the money to cover expenses at your discretion.
Disability insurance isn’t for someone out of work with the flu for a week. It’s designed to offer financial protection for sick and injured people who will miss work for an extended period. Some employers offer disability insurance as part of their workers’ benefits package, but you can also purchase it independently through an insurance company.
Like other types of insurance, you get financial protection in exchange for paying your disability insurance premium each month. Unlike other types of insurance, you won’t have to meet a minimum threshold or pay a deductible before you can access benefits. You’ll receive a percentage of your salary or wages each month. Percentages range from 50-80% of your paycheck, depending on your disability insurance policy.
There are two main types of disability insurance: short-term and long-term. The type of coverage and the length of benefits you receive depend on the type of insurance. It’s essential to understand the differences between the two, so you can choose the proper protection for your needs.
How Short-Term Disability Works
Short-term disability replaces a portion of your income during a temporary disabling event. This type of disability insurance may be fully covered by the employer, depending on where the company is located. Some states require companies to provide short-term disability to all employees. To qualify for benefits, you must prove that you cannot perform your regular work duties due to an injury or illness.
While short-term disability is similar to workers’ compensation, it has different qualifications and offers different coverage. Workers’ comp is applicable when you are injured or become ill due to your work, while short-term disability coverage applies when these events happen outside of work. Generally, you cannot qualify for both at the same time.
What qualifies as a short-term disability?
Once a qualifying event happens, you must file a disability claim with the insurance company. You may be required to undergo a medical evaluation to prove you cannot do your job before receiving benefits. Other times a medical form signed by a doctor that details the injury or illness is used.
Suffering from a severe illness, needing rehabilitative treatment after surgery, and pregnancy are conditions that qualify you for short-term disability. Many temporary medical conditions qualify, but there can be exclusions for pre-existing conditions and intentional injuries.
Short-term disability coverage
Once a claim is filed, there is a waiting period, also known as the elimination period, of one to 14 days before the benefits start. The exact waiting period varies by insurance policy. The date of your injury or illness is used as the beginning of your elimination period.
Income received from a short-term disability is taxable if funded by pre-taxed income. Employer-sponsored plans are often paid using pre-tax funds, so be aware of tax regulations and responsibilities associated with receiving this income.
Benefits coverage varies by policy but typically lasts between three and six months. If you need additional coverage beyond this period, a long-term disability insurance policy will be necessary to extend your benefits.
How Long-Term Disability Coverage Differs
Long-term disability is intended to provide benefits once you exhaust your short-term disability benefits. It continues to provide income until you can return to work. You must provide medical proof of the qualifying event, which needs to last beyond the initial elimination period. The exact terms of the elimination period depend on the insurance policy, but a 90 day period is standard for long-term disability.
Long-term disability benefits are typically only awarded once you cannot do any job. This differs from short-term disability, in which you can’t perform your current job the same way you did before the injury. Qualifying events for long-term disability include cancer treatment, chronic pain, or another debilitating injury or illness that lasts longer than their short-term disability coverage.
Once benefits are approved, they are paid out monthly until the terms of the policy are met, or you can return to work. If you qualify for Social Security Disability Insurance (SSDI) or another form of income replacement, your long-term policy will stop providing benefits even if they haven’t been exhausted.
Which Disability Insurance is Right for You?
The main difference between short-term and long-term disability insurance is their coverage length. Long-term disability offers a longer benefit period but has an extended waiting period before benefits start. Short-term disability policies can provide benefits faster for people suffering from temporary illnesses or injuries and may be easier to qualify for.
Illnesses and injuries are unpredictable, but they are likely to happen at some point before your retirement. Consider a combination of short- and long-term disability insurance policies to have comprehensive coverage if you’re unable to work. Shop around for plans based on the coverage available and see what you can afford.
To determine the amount of coverage you need, calculate your current monthly expenses and consider the amount you might owe for medical bills if you become injured or sick. This can help you determine the percentage of your salary to cover these costs and what terms to look for in a disability policy.
For more assistance, contact Finance is us. Our team of insurance and financial experts understands the importance of disability insurance. We can provide resources to help you identify your needs and determine which disability insurance policies are right for you.
Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.