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Disability insurance: Learn why you need it

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Disability insurance protects one's income in the case that he or she becomes disabled. Learn how it can protect you.

Just about every employee worries what would happen if they became ill or injured and couldn't go to work. Would they be able to pay monthly bills? How about their hard-earned savings, would there be enough to cover everything until they could work again?

That's when disability insurance comes into play. It can help ease those worries by providing a regular check while you convalesce.

Deborah Stocks, owner of Your Insurance Partner LLC in the Richmond area of Virginia, puts it simply: "Disability insurance is about protecting yourself," she says, "and protecting your income."

And most experts say that protection should be taken seriously, especially considering that, according to the Council for Disability Awareness (CDA), more than one in four people in their 20s will probably become disabled before retiring, The council adds that one in eight workers can expect to be disabled for five years or more before retirement. In a recent study, the Pew Charitable Trusts noted that only 55 percent of workers have enough savings to replace a month of loss income.

What is disability insurance?

Disability insurance will cover part of your salary if you become disabled, ending when you return to your job. The protection -- whether it's offered by your employer or you buy it yourself -- pays out a percentage of your salary.

How long does the protection last? 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.

If you buy your own policy, the insurance generally replaces 40 percent to 60 percent of your income.

About 60 percent of your income is typically paid to you if you get coverage through work.

Who needs disability insurance?

Do you have a job? Then you should consider disability insurance. "Your ability to earn income is your most valuable asset," Stocks says.

And here's another sobering thought: Life Happens, a nonprofit consumer group focusing on insurance issues, 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 offered by your employer or you might qualify for coverage provided by the Social Security Administration (SSA). Or you can buy your own policy; several companies sell the coverage, including Unum, MetLife, MassMutual, State Farm, Mutual of Omaha and Principal Financial Group.

How much does disability insurance cost?

Disability insurance is similar to life insurance in that costs are linked to your age and health - younger, healthier workers usually pay less than those who are older and less healthy.

Income also plays a big role. As an example, Stocks says that someone who is 30 and earns $30,000 a year would likely have a lower premium than someone who is 30 and earns $80,000 per year. She explains that the premium would be lower because the monthly benefit, which is linked to the income, would be lower.

She adds that a healthy 25-year-old earning $30,000 a year might pay $20 to $25 a month for coverage. But a 55-year-old with some health issues making $120,000 a year might pay $100 per month or more.

Experts note that people with major health conditions might not be able to buy their own disability insurance or a policy would be too expensive to be worthwhile.

Do I need more coverage if I have disability insurance through my job?

Financial advisers generally recommend buying your own disability policy to go along with your at-work plan because your employer's coverage may not be enough to fully protect you. They note that work plans typically pay you 60 percent of your salary, but you'll have to pay tax on those insurance benefits.

Also, the income amount from the at-work policy is usually capped at $5,000 a month, which may be less than 60 percent of your income if your a high-earner. And keep in mind that the 60 percent typically applies to base salary only. What about bonuses and commissions? Well, they usually don't figure in the equation, which could be a major problem for employees who depend on those money sources.

Experts further point out that group policies often only cover catastrophic events. However, about 90 percent of disability claims arise from illness, they say.

Also, you could lose your current at-work coverage if you change jobs. This could be a problem if your next job doesn't provide disability insurance.

Do I need an individual policy if I can get coverage through Social Security?

Social Security disability protection is usually available for those judged by the SSA to be totally disabled. 
Among supporting documentation, you'll have to get proof from a doctor

Qualifying can be difficult. Also, the average payout in 2017 was about $1,171 a month, which is less than many people's monthly expenses.

What should I look for in an individual policy?

Experts say you should consider working with an insurance or financial adviser to find out what type of policy is best for you.

There are several elements to consider, including the size of the benefit and the options you want. A variety of riders, or add-ons, are available, such as a cost-of-living adjustment rider to protect you against inflation. Another common rider continues retirement savings contributions while you're disabled.

To get a general idea of how much insurance might be right for you, check out Life Happens' "calculate your needs" disability insurance calculator.

What elements (and official terms) of disability insurance should I know?

  • Partial or total disability coverage. You should decide which choice works 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 - usually 30, 60 or 90 days - you'll need to be out of work before collecting any payment. Be aware that a policy with a shorter elimination period costs more.
  • Benefit period. This is how long you can collect benefits. You decide - 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 position, you'll likely pay less than a blue-collar worker who may face more risks on the job.
  • 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.
  • Inflation protection. A cost-of-living policy rider 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. Inflation, of course, would erode the value of your benefits by the time you reached middle age. This rider is recommended for younger people and tends to add 15 to 25 percent to the cost of a policy. If you're nearing retirement, experts say the extra cost probably isn't worth it.
  • Waiver of premium. This feature allows you to not pay premiums 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 are eating, bathing, dressing, toileting, continence and transferring (such as moving from a wheelchair to bed). This rider tends to increase a policy's cost by about 10 percent.
  • Retirement savings protection. This replaces the retirement savings contributions while you can't 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?

A doctor will examine you and determine if your disability prevents you from working. Insurers say that you'll be paid once that determination is made in your favor.

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