When it comes to your estate, it is important to realize that your ability to earn an income is probably your most important asset. Like all of your other assets, you need to protect your ability to earn an income. Income protection health insurance provides an income if you are unable to work and earn money due to a disability or illness. Although it is also called disability insurance, benefits are available if you cannot work for reasons other than disability. Mortgage protection insurance is similar in that it can pay your mortgage under similar circumstances.
The benefit of a disability policy is to provide a predetermined percentage of your salary as income during the policy’s term. This insurance can complement other types of ‘what if’ insurance which pay expenses, or be an alternative to lump sum insurances like critical illness insurance.
These policies are generally divided into short term disability insurance — usually paying for illnesses of three to six months — and long term disability insurance which pays if the disability is over six months. These times and even the definition of disability and qualifications to receive benefits can vary widely among policies.
Disability and income protection insurance is the most complex type of ‘what if’ insurance. It comes with many options, each appropriate to different people and situations, each being associated with its own benefits and limitations. The options available vary depending on the source. While many types of disabilities and illnesses are covered — such as anxiety and depression, back pain, cancer, chronic pain, diabetes, epilepsy, heart disease, leukemia, Parkinson’s disease, and stroke — uncontrolled diabetes, obesity, ALS, and alcohol or drug-related issues may not be. Women usually can’t be covered for pregnancy-related disabilities if they’re already pregnant when they buy the policy.
There are generally three places to get disability insurance: a group policy from your employer, an individual policy from a private insurance company, or through a federal or state agency.
All employers must offer worker’s compensation for work related injuries, but many will offer other forms of income protection coverage.
Five states and Puerto Rico require employers to provide short-term disability benefits: California, Hawaii, New Jersey, New York and Rhode Island.
Most employers that offer disability insurance as a benefit will pay some or all of the cost of premiums.
Some employers offer disability coverage as a voluntary benefit but don’t pay for it. However, this allows you to buy coverage through your employer’s insurance broker at a group rate.
Other things to consider before signing up for group disability insurance through your employer.
Individual disability insurance can be purchased from an insurance broker or directly from an insurance company.
When you purchase your policy directly it will be more expensive, but you may have more options than if you do so as a member of a professional organization.
Most individual disability policies provide long-term coverage, although some companies offer short-term policies as well.
Unlike employee insurance where the employer pays the premiums, individual insurance benefits are tax-free if you become disabled.
Individual policies belong to you and are not affected by job changes. You will have coverage as long as you pay the premiums.
If you do not have insurance, disability benefits may be available through some government agencies but the benefits are less and require more effort to receive.
Social Security will pay disability benefits to anyone who has worked long enough and paid Federal Insurance Contributions Act (FICA) taxes, referred to as Social Security Disability Insurance (SSDI).
State disability programs are offered in California, Hawaii, New Jersey, New York and Rhode Island. State programs only provide short-term disability coverage, typically up to six months.
The annual cost for an individual long-term disability insurance policy typically ranges from 1% to 3% of your annual salary. There are a number of factors affecting the cost that you should be aware of.
There are more factors to consider when creating your policy, many that are in addition to the considerations when choosing other types of ‘what if’ insurance.
You must choose between short-term or long-term disability insurance.
You will need to decide what percentage of your income you want to be covered. You should attempt to replace enough of it to maintain your lifestyle if you become disabled and cannot work.
You can have some control over the elimination period, which is the number of months you wait between becoming disabled and the policy to begin to pay out.
You may be able to choose between being considered disabled if you can no longer perform your specific job (own occupation) or if you are unable to work at all (any occupation). The labels refer to the level of di
sability needed to get benefits. In general, your level of disability would be higher if you are unable to work at all.
Another option is choosing between a “non-cancellable” policy and a “guaranteed renewable” policy.
You can opt for a constant benefit or a benefit that increases with inflation and/or salary increases, such as raises or a cost of living adjustment, by increasing the percentage of your income that you are entitled to.