For many of us, our ability to earn income is our greatest asset. But becoming disabled in some way can jeopardize this asset.
Without a stable source of income, our best-laid plans —education savings, mortgage payments, retirement goals — can fall like dominos. If you can’t work due to a health issue, long-term disability insurance can provide a source of income.
Do you need long-term disability insurance?
If your ability to work is hampered by a disability and you have dependents, like a spouse or children, you want to make sure you’ll be able to pay for your healthcare and living expenses, as well as maintain your lifestyle and savings goals.
Still, many of us tend to forego disability insurance. In fact, just 34 percent of Americans have disability coverage. 1 If you’re relatively young and don’t have a history of health problems, disability insurance might seem unnecessary.
But consider the following:
- One in four adults will become disabled before reaching retirement age.2 While we tend to think of life-altering disabilities like cancer or automobile accidents, issues like chronic illness, back injuries and diabetes can also prevent you from working.
- The average long-term disability claim is over 34 months — or almost 3 years, according to the Council for Disability Awareness. Yet nearly half of American adults do not have enough savings to cover 3 months of living expenses if they’re not earning any income.
What is disability insurance?
Disability insurance is there to protect you if you’re unable to work because of an accident, injury or illness. If you are a small business owner, certain policies may also protect your business and reimburse any covered expenses incurred during your disability. This can help you avoid depleting your emergency fund or retirement savings if something happens.
This is where you might have questions. What qualifies as a “disability”? How much does a plan cost? How much income will it provide in case of injury? The answer is: it depends on the plan.
- As the name suggests, short-term disability insurance covers you in the event of a short-term injury or illness — typically 3 to 6 months. This type of coverage is required by employers in some states.
- Long-term disability policies cover longer terms, such as 2, 5 or 10 years. Many mid- or large-size employers offer long-term disability coverage via a group plan like health insurance, but you can get supplemental coverage through an individual plan.
- The government also offers Social Security Disability Insurance, but only to qualified individuals who meet a strict definition of disability and adhere to stringent requirements.
Is employer long-term disability insurance enough?
Many private businesses offer long-term disability plans to their employees as part of a larger benefits package, including healthcare and retirement accounts. Employees typically pay a portion of the cost, with an average contribution of $256 per year.3
However, just 34 percent of U.S. employees in private industry have access to employer-sponsored disability insurance coverage.4 And, even if you do have access it, keep the following in mind:
- Employer-sponsored insurance policies aren't meant to cover 100 percent of lost income. Employer-sponsored policies typically replace about 60 percent of your income.2
- If your coverage is paid with pre-tax dollars, any benefits you receive are taxed, which further reduces your funds.
- Employer-sponsored plans include an “elimination period” ranging from 30 days to 2 years.5 This elimination period is the time you must wait from an injury to when you can begin collecting benefits. With employer-sponsored plans, you typically don’t have room to negotiate for a lower elimination period, meaning that in many cases you could end up having to wait longer to begin receiving a disability payout.
Individual long-term disability insurance
An individual long-term disability insurance policy can be used to supplement employer coverage or provide coverage if you don’t have access to an employer plan.
- Individual policies can cover from 70 to 85 percent of your income — more than what group plans generally offer.6 If you’re injured or disabled for years, or if you need to rely on disability insurance until you retire, having a source of income that comes close to what you earned while working can be the difference between getting by and living securely.
- Benefits you receive are not taxed, as you pay for coverage with after-tax dollars.
- Individual policies will not terminate when your employment ends, provided you continue to make the required premium payments.
- Individual plans are also more flexible and customizable than employer-sponsored plans. You may decide whether to purchase a policy with a shorter elimination period, so you won’t have to wait as long to receive benefits. You can also opt for what’s known as an “own-occupation” policy, which is beneficial if you work in a highly specialized profession like medicine or law. These policies typically pay full benefits if you’re unable to perform your job, even if you can do another job.
In terms of cost, you can typically buy an individual policy for 1 to 3 percent of what you earn.7 The cost of your premium is determined by several factors.8
Occupation: the riskier your job, the more expensive the premium.
Age: if you purchase an individual policy when you’re younger, you’ll pay less.
Elimination period: the shorter the period between injury and payout, the more you’ll pay.
Amount paid out: if you want to receive more income in the event of disability, the premium will rise.
Duration of plan: the longer the plan, the more it will cost.
Considering long-term disability insurance?
Whether you’re already covered by an employer-sponsored plan or not, individual long-term disability insurance may help you in case the unthinkable happens. Consider talking with a financial professional to discuss how a policy can help protect you in case of injury or illness.
Learn more about insurance options from U.S. Bancorp Investment.
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1 “Facts,” Social Security Administration, 2019.