Disability insurance will help you meet your financial obligations if you become physically unable to work due to an illness or injury. Disability insurance, like life insurance, protects your future earnings, and although it may not be as top of mind as life insurance, disability coverage can ultimately be at least as important. Your health insurance will cover the medical costs of a severe injury or sickness, but you will need disability insurance to cover any loss of wages while you are unable to work. In short, if you count on your income for housing and food, you should seriously consider disability coverage.
Disability insurance falls into two categories: short-term and long-term.
Short-term disability Short-term disability coverage replaces a portion of lost salary for six months or less of work. The length of coverage and payment percentage vary from plan to plan.
Long-term disability Long-term disability covers much longer lapses in income due to illness or injury, varying from 5 years total to continued coverage (generally) up to the age of 65. Typically, long-term disability coverage will replace 50-70% of your salary. Some employers allow employees to purchase extra insurance, raising the total to as much as 80%. Other policy options include a residual benefits rider that pays the difference between old and new salaries, if you are able to work at a different job but at a lower salary. A cost of living rider will increase value of the policy with inflation.
Many employers offer disability insurance for employees, but the plans vary considerably, coverage can be insufficient, and payouts are subject to taxes. Individual disability coverage is generally more expensive than employer disability coverage, but payouts are not necessarily subject to taxes, and you can opt for more comprehensive coverage.
Some experts contend that short- and long-term disability insurance is the most important insurance you buy. We can help you understand the different types of coverage available and select the right product to protect you and your family against financial hardship if you can no longer earn an income.