The majority of us would face financial hardship after a just a few months without work, according to Gallup's recent Economy and Personal Finance poll. Fourteen percent of U.S. workers say they could go just one week before experiencing significant financial hardship if they lost their job. Twenty-nine percent said they could go one month. Twenty-six percent said they could last four months, while only about one-third of workers could get by for a year or more.
That's where disability insurance can come in -- providing a way for you to help pay your bills while you're on the road to recovery.
"Disability insurance is about protecting yourself and protecting your income," says Deborah Stocks, owner of Your Insurance Partner LLC in Glen Allen, Virginia.
What is disability insurance?
If you become disabled and aren't able to work, disability insurance kicks in to cover part of your salary until you can return to your job. Disability insurance -- whether it's through an employer or a policy you buy yourself -- pays out a percentage of your income if you get sick or injured and can't work.
Short-term disability insurance typically covers you for three months, and long-term disability insurance kicks in after the short-term period ends. Long-term disability usually lasts for two, five or 10 years, or until age 65 or 67, depending on the policy.
Generally, individual disability insurance replaces 45 percent to 65 percent of your income. Disability insurance through work typically pays 60 percent of your income.
Who needs disability insurance?
Anyone who has a job should consider purchasing disability insurance. "Your ability to earn income is your most valuable asset," Stocks says.
The nonprofit Life Happens, which helps educate consumers about insurance, says you have a 30 percent chance of having an illness or injury that keeps you out of work for 90 days or longer. In most cases, the disability isn't work-related, so you won't be able to collect workers' compensation.
Where can I get disability insurance?
You may be covered by a group disability insurance policy through your job or you might qualify for disability coverage through the Social Security Administration. You can also purchase an individual policy.
How much does disability insurance cost?
Similar to life insurance, the cost of disability insurance is tied to your age and health. If you're young and in good health you'll typically pay less than someone who is older and has health issues.
Your income also has a major role to play, Stocks says. So if you're 30-years-old and earn $30,000 a year, your premium will usually be less than another 30-year-old in similar health who earns $80,000 per year. Your premium would be lower because your monthly benefit, which is tied to your income, would be lower.
A healthy 25-year-old earning $30,000 a year might pay $20 to $25 a month for disability insurance, Stocks says. A 55-year-old with some health issues earning $120,000 a year might pay $100 per month.
If you have major health issues, you might not be able to purchase disability insurance or it might be prohibitively expensive.
Do I need more coverage if I have disability insurance through my job?
Most financial advisers say an individual disability insurance policy is a must, in addition to what you have through work, because plans offered through your employer often fall short of the coverage you will likely need.
Most disability plans through work pay you 60 percent of your salary, but you may not actually get that amount in benefits.
Typically your employer pays the cost of coverage, but if you have to collect, you'll have to pay tax on your insurance benefits, says John Nichols, president of the Disability Resource Group in Chicago.
The amount of income is also generally capped at $5,000 a month, which may be less than 60 percent of your income, depending on your salary.
Additionally, the 60 percent figure generally applies to base salary only. Bonuses and commissions aren't counted in the equation -- so that means a lot less disability compensation for workers who depend on those income sources.
Another issue with group policies is that they often just cover catastrophic events, while 90 percent of disability claims arise from illness, Nichols says.
And if you change jobs, you'll lose that particular coverage.
Do I need an individual policy if I can get coverage through Social Security?
You also may be eligible for Social Security coverage if you're judged to be totally disabled. But it can be hard to qualify for that coverage, and in 2012 the average payout was about $1,100 per month -- far less than many people's monthly expenses.
What should I look for in an individual policy?
There's no one-size-fits-all solution if you're looking for an individual disability policy, so you should consider working with an insurance adviser or financial adviser, Nichols says. There are plenty of variations, and you need to craft the policy that works best for your situation.
"This is customized. Everyone has a different lifestyle and is in a different place in life," he says.
What other terms should I know?
- Partial or total disability coverage. Decide which scenario is best for you: a policy that only kicks in if you're totally disabled, or one that allows you to collect partial payment if you're partially disabled and can only work part-time.
- Elimination period. This is the length of time you'll need to be out of work before collecting any payment. It's often 30, 60 or 90 days. A policy with a shorter elimination period costs more.
- Benefit period. This is the length of time you'll collect your benefits. It could be for two years, five years, until age 65, until retirement age, or for another period of time.
- Occupational class. The cost of coverage in part depends on your job. If you have a white-collar job, you'd generally pay less than a blue-collar worker.
- Own occupation vs. any occupation. You can get coverage that takes effect if you can't do your particular profession, or you can purchase a policy that covers you if you can't perform any occupation. Someone like a neurosurgeon might opt for coverage for their own profession. The coverage is more expensive. Coverage for "any occupation" means you can't perform any job for which you have the education and training, Stocks says.
- Inflation protection. A cost-of-living adjustment rider, or policy add-on, will increase benefits to keep pace with inflation if you become disabled -- say, for instance, you become permanently disabled and unable to work at age 30. Imagine how inflation would erode the value of your benefits by the time you reached middle age. This rider is recommended for younger people and adds 15 to 25 percent to the cost of a policy. If you're nearing retirement, the extra cost probably isn't worth it.
- Waiver of premium. With this feature, you don't have to pay the disability insurance premium while you are disabled and collecting benefits.
- Extra coverage for severe disability. In addition to paying a percentage of your salary, a policy with a catastrophic rider pays additional money if you're unable to perform two out of six "activities of daily living" or have a cognitive impairment. The six activities of daily living are eating, bathing, dressing, toileting, continence and transferring (such as moving from a wheelchair to bed). This rider adds about 10 percent to the cost of a disability policy.
- Retirement savings protection. This feature replaces the contributions to retirement savings while you're disabled and unable to work. The Guardian's Retirement Protection Plus rider, for instance, pays 100 percent of what you normally set aside for retirement, as well as any employer matching contributions, into a trust. A trustee invests the benefits at your direction.
How hard is it to collect if you're disabled?
Your physician will determine if you can no longer "perform the substantial duties of your job," Nichols says. "If you have a legitimate claim, you will be paid," he says.