You’re far more likely to become disabled than to die prematurely. This may be surprising to some of you reading but about 1 in 4of today’s 20-year-olds will become disabled for 90 days or more before reaching age 67.
So, I believe it's necessary that working individuals get proper disability insurance coverage especially if you’re self-employed and/or proper disability insurance is not provided by your employer.
What is disability insurance?
Disability insurance is a type of insurance that provides income if a policyholder becomes disabled and is unable to work anymore.
For example, let’s say a worker earns $200,000 in salary and he/she becomes disabled. If this disability prevents them from continuing work, their disability insurance can compensate them for a portion of their lost income.
There are two types of disability coverage, short-term and long-term coverage.
Short-term coverage:
- Benefit duration: 13-26 weeks.
- Offered by employers, can be supplemented through individual policies.
- Covers mostly illnesses or injuries.
- Generally, covers 40 – 100% of your base income.
- Typically has a short waiting period, such as two weeks, after you become disabled and before benefits start being paid.
Long-term coverage:
- Benefit duration: Varies but often up to retirement age.
- Offered by many employers, and many private insurance companies.
- Covers mostly illnesses or injuries.
- Generally, covers 2/3 of your income.
- Typically has a waiting period, such as 90-180 days after disability before benefits begin.
On top of this, there is what’s called “any occupation" policies and “own occupation” policies. “Any occupation” can pay benefits if you are unable to work in any job you are reasonably qualified for. “Own occupation” can pay benefits if you are unable to work in your current role (before disability). Due to this, own occupation is more expensive but often well worth it.
How much coverage do I need? Consider the following factors.
- Is the elimination period suitable? Is your emergency fund large enough to bridge the gap until disability benefits start?
- Will benefits last long enough? Make sure the benefit period is long enough to cover your needs. Make sure there aren’t any gaps between your short-term and long-term policies.
- Does the policy replace enough of your income? This is the most overlooked consideration! Benefits from a policy that you pay for with after-tax dollars are generally tax-free. So, policies typically cover 60-70% of income.
Every single working person should consider disability insurance coverage. Your biggest asset in your working years is your ability to earn income and that asset should be protected. If you currently don’t have proper coverage available to you, consider purchasing additional coverage through a private insurer.
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