Long-term disability insurance is the forgotten insurance
Most people know the importance of auto, homeowners, health and life insurance. For some reason, disability coverage which replaces lost earnings if you can’t work, tends to be ignored- until you need it.
A recent article in Bloomberg Businessweek cited a government studies showing that a 20-year-old worker has a 30 percent chance of becoming disabled before reaching retirement age, yet only about one-third of employees in private industry have any type of long term disability insurance. The figures come from the Bureau of Labor Statistics.
Dave Carpenter of Bloomberg Businessweek, quotes insurance actuary for the Consumer Federation of America, James Hunt: “It could be argued that the disability of the breadwinner is worse than the death of a breadwinner, because the disabled person is still soaking up money.”
That brings up key questions and points about disability coverage and who pays for it. Here are some key points to think about:
How Does Disability Insurance Work?
– Disability insurance protects from a loss of income resulting from an inability to work due to an accident or illness. Many people think only of accidents when they even consider disability coverage, but many disability claims result from illness. You typically receive disability payments starting three to six months after you become unable to work.
-Benefits can last a set number of years or until retirement age. If you have a very specialized job or can afford higher premiums you may want to choose the “own occupation” policy. This coverage pays benefits to you if you are unable to perform the major duties of your own occupation. Cost will vary depending on the length of the benefit period chosen when you purchase the policy.
-Another optional coverage you may want to consider is a policy that pays “residual” benefits, which will compensate for a decline in your income when you are able to work at a new job that pays less than your original position.
Who Pays for this coverage??
There are three payment sources for this type of coverage: The Social Security Administration, employers and private insurers.
-Social Security Disability Insurance is the bedrock protection against disability. The program is paid for through FICA taxes but can be very difficult to quality for. SSDI has a very strict definition of disability and it can take two or more years to be approved for benefits. You can only qualify if you are unable to work in any capacity, not just your chosen occupation. You can review a list of what conditions are considered disabling at the agency’s website, www.ssa.gov.
-Your employer may offer disability through a group plan, which pays for a portion of your salary
-Private insurance coverage is most often purchased by high-income professionals like doctors and lawyers who have huge investments in their earning potential, self- employed workers or business owners and executives looking for supplemental coverage.
So How Do I Know if I Have Enough Coverage at Work and What will Disability Coverage Cost Me??
-Check with the Human Resources Department at your employer. Many companies only offer short term, not long term disability coverage. When they do offer long term disability coverage, the plan typically replaces just 40-60 percent of your salary up to a maximum of $5,000 a month or $60,000 per year. Note: If your employer pays your insurance premiums the checks will also be taxable to you. Start here because a number of company benefits have been shrinking in recent years. Many group policies now limit the length of benefits to two years when you can’t perform your job duties.
-If you can, purchase additional coverage through your employer or consider getting extra insurance from a private insurer for the difference to bring your coverage up to 70-80 percent of your income.
Prices vary based on age, gender, occupation, amount of coverage and your health status. Check with us here at Perimeter Insurance Agency in Oklahoma City for more information.
To read the complete article by Dave Carpenter in Bloomberg Businessweek, click here-http://www.businessweek.com/ap/2012-07-25/overlooking-disability-insurance-can-be-costly
You can also hear real life stories and learn more about disability insurance coverage at the Life Foundation website: http://www.lifehappens.org/portfolio/cindy-wrenn-a-new-home-saved-from-disaster/