Pre-2020 most of us would have had difficulty imagining (let alone preparing for) the effects of a worldwide virus. It seemed…
(You just knew I had to throw that GIF in there, right?)
That’s the rough thing about the unexpected. It’s difficult to prepare for or comprehend the full extent of its effect. The same rings true when it comes to sudden injuries or illnesses.
So, what do you do when a disability keeps you from being able to provide for yourself and your dependents? Well, as a careful planner by nature, that’s what I want to discuss today…
Why Disability Insurance Matters – Beth Loxley’s Take
The not-so-funny thing about unpleasant surprises – it’s almost impossible to see them coming and they’re usually harbingers of not-so-good things. It’d be hard to find an occurrence fitting that description better than an accident or illness that takes away your ability to make a living.
That’s why there’s disability insurance, which is designed to pay you a fraction of the amount of your income if you suffer a qualifying injury or illness and you can’t work. It’s also known as DI.
Here’s what else Northeast Ohio people need to know.
Nobody ever thinks they’ll need it
Recent surveys showed that fewer than two out of five Americans’ savings could withstand much of a nasty surprise. That doesn’t leave much margin for losing your income.
At the same time, figures cited by the Council for Disability Awareness show that at least 51 million working adults in the U.S. lack disability insurance (other than some basic coverage through Social Security, which pays at most in the low four figures a month).
So what? I’m not going to become disabled …
We truly hope you’re right about that, but the Council adds that the chances of missing work due to illness, injury, or pregnancy (which is covered by short-term disability insurance) are greater than you think. One in four of today’s 20-year-olds can expect to be out of work for at least a year because of a disabling condition before they hit normal retirement age – and each year about 5% of working Americans experience a short-term disability (six months or less).
What it covers and what you pay
This coverage generally comes in either short-term or long-term. Short-term policies pay out anywhere from 40-60% of your income. You can also get income protection insurance to pay out more. Long-term disability coverage pays out a bigger portion of your former income with coverage for a minimum of 2 years – on average five years. Some policies also cover bonuses, commissions, or other income not generally covered by long-term DI.
Your monthly benefit is based on your income at the time you purchase the policy – not when you get hurt – and starts paying after a waiting period. Short-term DI generally has a shorter waiting period than long-term. (Longer waiting periods and shorter coverage times generally lower your premium.)
Believe it or not, many people have DI and might not even know – through their job at no cost. Check with your HR department. Sometimes job-provided DI isn’t enough to make an employee feel completely protected, either. If that describes you, you may want to think about supplemental DI.
(By the way, Worker’s Compensation insurance only applies if you’re injured on the job.)
If you’re self-employed or uncovered by a group plan (which might be offered through a freelance or other group you belong to), chances are you’re really going to be left hanging for income if you become disabled. Individual long-term coverage is also pricey, often as much as 3% of your annual income.
The amount starts at what’s called your base rate, which factors in such things as your age, the length of your waiting and benefit periods, your gender, occupation, smoking history, and state of residence. Various factors raise or lower your premium. (Here’s a calculator to get you started.)
How much coverage?
When you’re figuring DI payouts – the scope of your policy and its cost – it’s a lot like figuring out a budget. Think about:
- Your potential earnings through your working life
- Your monthly payments for debts
- Your regular expenses
- Your assets (if you become disabled, do you want to preserve these or spend them down?)
From there you can do the math for the disability benefits you’ll need.
What else should you bear in mind?
- Inflation’s on everybody’s mind these days and nobody’s sure it’s going anywhere. Look for coverage or a rider that will adjust your disability benefits for inflation in the future.
- A residual disability rider will help if you become disabled but can still work part-time. By the same token, consider coverage that will pay more if you’re “catastrophically” affected by a disability, such as by losing your sight or two or more limbs.
- A family care benefit can cover you if you must give up your job and income to care for a family member who becomes seriously sick.
Deciding if you need this coverage means facing some hard realities about your life and livelihood. But as with many financial decisions, there’s no way around the problem other than facing it head-on.
Sometimes facing decisions like this on your own can be daunting. We’re not Northeast Ohio insurance experts by any means, but we’re happy to look things over with you. Reach out if you want to chat:
We’re in your corner, no matter what the storms of life bring.
Looking out for you,