This article was last updated on August 31
Ask yourself this question. What is your most important and valuable asset? Think about it for a minute. Is it your house? Your savings or your 401(k) retirement plan? Your sports car or rare memorabilia?
While all of these things are both important and valuable, none of them truly represent your MOST valuable asset – your ability to earn an income. If you are like most people, you depend on your paycheck to pay your regular living expenses and savings for future needs. And, without an income, most all other assets would be nearly impossible to obtain.
Ask yourself another question. What would you do if you could no longer earn an income? Would you still be able to pay your rent or mortgage? Would you still be able to buy food and other necessities? Even with an emergency fund, how long could you go before that runs out?
The Odds of Disability – They’re Higher Than You May Think
Anyone who depends on their income to pay living expenses should consider having a disability insurance policy. Although we never think it can happen to us, the truth is that a third of all Americans who are between the ages of 35 and 65 will become disabled for over 90 days at some point in their lives. And, according to the American Council of Life Insurers, one in seven workers will remain disabled for over five years. That’s a long time to go without your regular income.
While many people believe that long term disabilities are caused by accidents, most are actually caused by illnesses such as heart disease or cancer. Due to these disabilities and the loss of income many are forced towards financial ruin, through to foreclose on their homes or even having to declare bankruptcy.
How Does Disability Insurance Work?
A disability insurance policy will replace a portion of your income if you become disabled and are not able to work. Many employers offer disability insurance plans as part of their overall employee benefits package. In addition, individual policies are also available.
There are some differences between individual and group disability insurance policies. And, just because you are covered by a plan at work may not mean that you have all the coverage you need.
Group Disability Insurance Plans
Many employers offer short-term and long-term disability insurance coverage. Short-term disability insurance is also referred to as sick leave. Benefits for short-term disability, or sick leave, usually begin as soon as you cannot work due to an illness or injury. It is also often used for women during maternity leave of for elective surgery.
Short-term disability benefits can range from just a few days to as long as a year. Often the benefit duration is based on how long you have worked for the employer. Therefore, the longer you have been employed, the longer your benefit period will be, up to a cap. Once short-term disability runs out, you may be covered by your long-term disability plan.
Typically, long-term group disability insurance policies will only cover up to 60 percent of your income. However, this 60 percent normally only refers to your regular salary amount. So, if you receive a portion of your income in the form of bonuses or commissions, you will not be insured for that amount. This can make a big difference in the amount of benefit you would receive.
Additionally, most group disability plans place a limit on the amount of time they will pay your benefits. For example, many plans will only pay benefits if you are unable to perform your job duties for just two years. If you were to suffer from a long-term chronic condition, you could be out of luck after the two year time period is up.
If you are covered by a disability plan by your employer, it is important to understand just how much coverage you will receive and for how long. In many cases, it will make sense to supplement your group disability benefits with an individual disability insurance plan.
Individual Disability Insurance Plans
With an individual disability insurance policy, you can receive benefits up to 80 percent of your income. And, unlike with a group policy, income received such as bonuses will be considered in the total. In addition, the amount of benefits you receive is often not offset by other benefits you receive such as Social Security.
Benefits from individual disability insurance policies generally can last from five years up until you reach retirement age. Another nice feature of these plans is that if you pay the premium out of pocket, the benefits will be received tax free.
Owning an individual disability insurance plan also means that your policy will stay with you if you change jobs or lose your group coverage for reasons that are out of your control. This can give you the peace of mind in knowing that your most important asset is covered wherever you go.