Guest post by Chris Walter of Policy Genius.
Why is long-term disability insurance still a mystery to so many people? It’s a pretty basic type of insurance that can make a huge impact on someone’s life, and yet 7 out of 10 people who work in the private sector don’t have it.
This is too bad, because for most people, long-term disability insurance runs a close second to health insurance in terms of importance. And it’s easy to shop for a good policy on your own, if you know what to look for.
That “if you know what to look for” is the tricky part, so here are some basic facts to turn you into a long-term disability insurance expert in just a few minutes.
What is it? In plain English, please.
Disability insurance is like insurance for your paycheck. It replaces your income if a health problem keeps you from working for an extended period of time. It protects the assets you’d otherwise deplete to cover your living expenses. Think of it as the paycheck side of health insurance. A more accurate name for it (and what it’s called in other countries) is income protection. Shopping for long-term disability insurance is somewhat like shopping for life insurance, because they both require a medical exam and a review of your health history. For long-term disability, an insurer will also look at your employment history and income to help determine the size of the monthly benefit.
Do I need it?
The risk and impact of disability is greater than you think. The fact is that our risk of disability is twice as high as our risk of early death. According to the Social Security Administration, 1 in 4 of today’s 20-year olds will become disabled for a period of time before reaching age 67. Also, disability isn’t necessarily permanent or catastrophic. It’s simply a health condition that renders you unable to work for an extended period of time (typically 3 months or longer). The most common causes of disability are illnesses like cancer.
If you work and support yourself, you should definitely have some sort of disability insurance. And if you have a good emergency savings fund built up, you probably still need it (although you can save money on the policy by opting for a longer waiting period). You can live off your emergency fund for 6 months (that’s the whole point of it), but it’s that scenario where you’re unable to work for two years, while also facing growing medical expenses, when your financial plans can fall apart. There’s a reason why the majority of personal bankruptcies are due to medical expenses.
Can I just rely on Social Security if I become disabled?
It may help, but don’t expect it to be enough. The average monthly benefit paid by Social Security Disability Insurance is around $1,000, and that’s assuming your claim is approved. More than half of initial benefit claims are rejected, which is one reason why it can take up to 2 years to start receiving benefits.
Is it expensive?
The short answer is, “Not if you’re young and have a pretty clean bill of health.” But like any insurance product, the amount you pay reflects how risky the insurer thinks it will be to cover you.
For long-term disability, these are the things that tend to drive up the cost.
- You work in a high-risk job.
- You already suffer from health issues.
- You’re over 40.
- You’re a woman. (Yes, really.)
About those last two bullets: The 40-year-old threshold is particularly important to keep in mind. If you’re under 40 and thinking of buying long-term disability insurance, do it sooner rather than later, because the rate will keep going up with every birthday. (Not to mention your health record will probably become more “interesting” as you age, which also drives up the cost.)
As far as women paying more, well, the official argument is that women file more disability claims than men do, which is true. Whether that fully explains the price differential is anyone’s guess.
For coverage that replaces your take-home salary, expect to pay around 2-4% of your gross annual income in premiums. And if you’re on a tight budget, you can almost always adjust a policy’s features to get good coverage at a reasonable cost.
My employer offers disability insurance. Should I get that?
Yes! You should always max out the disability coverage available through your employer, because it’s usually affordable and often guaranteed issue (meaning no medical exam). But make sure it provides enough coverage, and find out whether it’s convertible to an individual policy if you ever leave your job. For a lot of us, it makes sense to supplement any workplace coverage with an individual policy.
What does a good long-term disability policy look like?
The ideal policy will pay 60% of your income each month until you reach retirement age, even if you start working in another profession. It will also come with a guarantee that the insurer can’t raise your premiums or cancel the policy unexpectedly.
In reality, there are a lot of factors that can affect the scope and cost of the policy (for example your profession, your health history, or your age), so it may not be possible to hit all of those ideals in one affordable policy. But a broker can help you explore your options so you know for sure.
What’s more important for me to buy first—life insurance or disability insurance?
If you’ve got dependents and you work to support them, then both types of insurance are equally important! One nice thing about shopping for them at the same time is you can use the same medical exam, even if you don’t buy both policies from the same insurer.
If you don’t have any dependents, then it’s disability all the way! Whatever the case, it’s a simple and affordable way to protect your long-term financial plans from future health complications.