Most of us are not even considering the possibility that we might suffer a debilitating accident or illness. Tough, the Social Security Administration comes with an ugly statistic: there is a chance of 1 in 4 for the 20-years-olds to become disabled at some point in their life before retiring. This may have a devastating impact on their standard of living and financial security.
In the unfortunate situation when you are not able to work, disability insurance will protect your future earning potential. Your lost income due to a disability will be replaced by tax-free monthly cash payments.
These financial products are a very important part of a financial plan and may be suitable for you if:
- Your occupation is very specialized, like in the case of surgeons, and you make substantial sums of money.
- There are other people who depend on your income for their standard of living.
- Your occupation is very risky, such as a police officer or firefighter, where the rates of injury are pretty high.
- You have a long-term financial goal and you want to accumulate money for it, such as paying for a child’s education and retirement.
- You don’t have enough money to pay out of your pocket for long-term medical care.
How much does it cost?
The cost of the disability insurance is influenced by some factors such as:
- The policy’s occupational class: in case you want it in the event you will not be able to work your own job, it will be more expensive, while for any other job will be cheaper.
- Your occupational risk: be prepared to pay more for premiums in case you have a dangerous job with a high risk of becoming injured.
- How long do you wait to receive benefits: there are certain policies that require you to wait a period of time before claiming benefits, for example, 90 days after you become disabled. The policy will be cheaper if the wait is longer.
- Your gender and age: the premiums are higher for older applicants; also, the insurance for women is cheaper than for men.
- How much benefit do you want: covering $3,000 per month in income costs much less than $11,000 per month.
- Whether you are a smoker: the risk of becoming disabled is higher for smokers.
Why Should You Buy Disability Insurance?
We will give you an example to show you why it would be a good idea to purchase disability insurance. If you want to purchase a brand-new car with a $30,000 loan from your bank, you will have to provide the bank a proof of auto insurance. The bank wants to make sure that it can get its money back in case you destroy your car. You will have to pay $1,000 per year for the auto coverage.
Most people believe that it is smart to spend $1,000 every year to ensure a car that values $30,000.
Let’s now take a 30-year-old school teacher whose plan is to retire at the age of 60. He earns $50,000 per year, with a total lifetime earnings of $1.5 million ($50,000 X 30 years = $1.5 million). What it would be like to purchase coverage so regardless of what will happen you can be sure that you will be able to earn your projected lifetime earnings?
This is what disability products are doing. In case you will destroy your car without insurance, you will lose $29,000 (the value of the car minus the savings for not being covered). If you will not able to work anymore due to a disability, you will lose $1.5 million in future income.
What types of disability insurance are there?
Disability insurance coverage is made to replace your income in case you are not able to work anymore. As there are many different types of jobs, there are different types of disability insurance plans.
The most important distinction is related to your occupation. With an own-occupation policy, you will be protected in case you are no longer able to perform the tasks associated with your actual job. Nowadays these are the most popular policies on the market. You may be still able to work at another job, but not at your actual level or current role. For instance, a surgeon who loses his ability to perform complicated surgeries could be still able to work as a guard in a parking lot. Even if the insured continues to work, the company would pay a benefit if she or he has an own-occupation policy. Usually, insurance companies define “own occupation” as any job falling within the same profession, such as law or medicine.
As they offer stricter coverage, any occupation policies are cheaper in general. These offer coverage for the disabilities that prevent the insured to perform any type of job. In case a doctor is not able to do surgeries anymore, but can still work as a guard, she or he will not be able to make a request under the any-occupation policy.
Both types of disability income policies include several policy riders or components. The most common ones are the following:
- Future increase benefit: Think that you purchase a policy today and your income will increase substantially over time. You will be able to buy extra coverage without going through extra underwriting, thanks to the future increased benefit.
- Income benefit: The amount of money you will receive every month. During the application process, the specific amount will be determined.
- Index income benefit: Usually the Consumer Price Index defines the amount by which your income payment will increase every year (for example, up to 3%).
- Catastrophic disability benefit: A different benefit amount disposable in case of a severe disability such as becoming severely mentally impaired, losing limbs or becoming blind.
How do Insurance Companies Define “Disability”?
It is very important to understand and know the definitions of the terms in your contract. Companies define three types of “disabilities”:
The partial disability will not allow you to work your current job, but will not prohibit you to work any other job. For example, a doctor could lose his ability to perform surgeries but could still teach medical students. Teachers are paid less than doctors, which results in partial disability.
The total disability is for those who are not able to work at the current time, but there is hope for recovery after enough care from a medical professional and time. For instance, a construction worker can claim a total disability while he recovers from hurting his back. There is hope he will get back to work in the future.
Presumptive or catastrophic disability refers to a condition in which your life is changed forever and there is no chance for recovery. A catastrophically disabled individual will need assistance from another person to perform daily activities such as moving around, eating, dressing, and bathing.
How to buy Disability Insurance
There are a few steps you need to follow if you want to purchase disability insurance, such as:
- Establish how much coverage you need and which characteristics you want.
- Shop around for multiple quotes
- Apply for the insurance
- Pass the underwriting process
- Accept the offer and sign the contract
What are the chances of becoming disabled?
According to the Social Security Administration, 20-year-olds have a 1-in-4 chance to become disabled in their lifetime.
Can I be covered if I have a pre-existing condition?
Yes, it is possible to get disability insurance even though you have a pre-existing condition.
What type should I buy, own-occupation or any-occupation?
Own-occupation policies are more expensive, but offer greater protection. On the other hand, any-occupation policies cost less but offer coverage just for catastrophic situations when you are not able to work anywhere.
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