Disability Insurance

Disability insurance provides income for you should you have to miss work due to a disability. Without disability insurance, should an injury or other unforeseen physical issue occur that would necessitate you to miss work for an extended period of time, you would possibly be without any money coming into you checking account to pay bills. This is obviously a problematic possibility for most people.

To fix this possible problem many people choose to purchase insurance. How this works is that a premium is paid to the insurance company and in exchange the insurance company will pay the policy holder (you in this hypothetical situation) should a qualifying disability occur.

Many employers will provide a default level of long-term disability insurance, commonly paying 50% to 60% of qualifying income, which typically starts to be paid at 26 weeks. Sometimes this isn’t a company-paid benefit but an option for employees but one that comes with a cost. Check out your own company’s benefits handbook for more information.

Disability insurance is commonly a benefit provided through an employer, but purchasing the right type and amount is best covered in Next Best Step:

How to purchase/elect Disability Insurance

Disability insurance can be purchased individually from an insurance company; however, many companies will provide their people with the opportunity to purchase coverage, for both short-term and long-term, with premiums paid through payroll deductions and sometimes with no employee-paid premiums at all.

Election to purchase typically occurs during the annual open enrollment period or if a qualifying life event occurs.

Short-Term Disability Example

Meet Kayla, she works as a nurse at the local hospital and is making $70,000 a year. When she first joined the hospital she signed up for Short-Term Disability Insurance that will provide 60% of pay in the event of a qualifying disability, so she’s been paying premiums out of her paycheck. Unfortunately, Kayla slipped on some ice at home and broke her leg. This injury will prevent her from working for the next 5 months.

Because Kayla has been paying premiums for short-term disability insurance, she will receive - typically after a waiting period - 60% of her pay during this time off, or $3,500 per month. Because her premiums were being paid on an after-tax basis, the entirety of the 60% insurance benefit is tax-free at the federal level.

To make matters worse, Kayla has a complication in recovery that causes her to continue to miss work beyond what was originally anticipated. Her short-term disability insurance stops paying out at 6 months. Fortunately, Kayla had purchased long-term disability insurance through her insurance agent that covers 50% of income, or $2,916 per month, so Kayla continues to have some income to cover her living expenses while out of work.

Why would someone choose to purchase disability insurance?

Purchasing both short-term and long-term disability insurance is often-times, though not always, used:

  • By single individuals: Should something come-up that would cause you to be unable to earn an income and you also do not have another person who could financially provide for you, disability insurance is generally considered to be an absolute must-have.

  • Individuals with dependents: Are you supporting one or more other people with your paycheck, whether that be a child (or children), a spouse, a loved one, a parent, or whomever? Having some form of guaranteed income can be a great idea.

FAQs

  • No, though all disability insurance policies will have similar basic features, such as a payout that occurs in the event of a qualifying disability, there will be variations of the waiting period, how long the benefit is good for, whether there is inflation adjustments to the benefit, and more.

  • If applying for STDI or LTDI through an employer, evidence of insurability may not be - though sometimes is - necessary. However, when purchasing a policy through an insurance company directly it is very common to have to complete a health questionnaire and possibly even a medical examination.

  • The disability insurance that is available through your employer, potentially both short-term and long-term, will probably provide sufficient coverage for you. However, every person's situation is unique and you would be best served to ask a qualified financial planner what is best for you.