Your most important asset is not your home, your car, your jewelry or other possessions. It’s your ability to earn a living. All of your plans for the future are based on the assumption that you will continue to earn a paycheck until you retire. But what would happen if those paychecks stopped? That’s where disability insurance comes in. It provides income to you and your family if you are unable to work because of illness or injury.
Think about how much you earn in a year and what that would be over a lifetime. The financial consequences of a disability could cost you millions. A 25-year-old worker who makes $50,000 a year and suffers a permanent disability could lose $3.8 million in future earnings.1 You don’t hesitate to insure your home, car and other valuable possessions, so why wouldn't you insure something that is much more valuable than all those things?
If you’re still not convinced that your income is worth insuring, think about how long you’d last without your paycheck before you’d have trouble paying for everyday expenses. In the event of a disabling illness or injury, disability insurance provides you and your family with a source of replacement income to help make ends meet until you’re able to return to work.
Explore this section to learn more about disability coverage, including the different sources of disability income protection and ways to get coverage. The Disability Insurance Needs Calculator can help you determine how much coverage you need.
1 LIFE Foundation, 2008
If you have a job, you may want to consider disability insurance. Nearly one in three women can expect to suffer a disability that keeps them out of work for 90 days or longer at some point during their working years.2 For men, the odds are about one in four.3 And one worker in seven can expect to be disabled for five or more years before retirement.4
For many, a sudden interruption of income could have serious financial consequences. Most of us have some kind of personal debt, typically a mortgage or credit card bills. Would you be able to maintain your standard of living if you were too ill or injured to work? Half of all home foreclosures in the United States result from disability5, as do an alarming number of personal bankruptcies.
Determine your chances of becoming disabled and see how much you will earn in your lifetime by using our calculator tools in the coming steps.
2,3 LIFE Foundation, 2008
4 U.S. Commerce Department, 2008
5 Health Affairs, The Policy Journal of the Health Sphere, 2005
From time to time, things happen that create a need for you to reevaluate your disability insurance coverage. This section examines the most common types of life events that trigger the need to reassess your disability insurance needs.
Changes at Work
If you have group disability insurance through your employer, benefits typically replace a fixed percentage of your salary. If you get a raise, your disability benefit will adjust upward. An exception would be if you are a well-compensated employee and your income already places you at your company's maximum monthly cap for disability payments, often set around $4,000 or $5,000. In these instances, if you get a raise and you're concerned about the loss of income that would occur if you were to become disabled, you can always seek to supplement your group coverage with an individually purchased policy.
If you work for a company that provides a group benefit but decide to go into business for yourself, individual coverage is available. If you're self-employed and your income increases significantly, you can increase coverage you already own or purchase a supplemental policy.
Changes at home
If you become disabled and are unable to work, you'll be in trouble if you don't have a source of replacement income to help make ends meet. That need becomes even more pronounced when other people depend on your income. So every time there's a change in your family situation, either in your immediate or your extended family, make sure you carefully consider whether that change should trigger a reevaluation of your disability insurance needs.
Changes in your finances
As your income increases, you can increase your disability insurance coverage because you would have to replace a higher amount of income to keep pace with the higher standard of living to which you and your family have become accustomed. You can also purchase individual disability income insurance (or increase existing coverage) every time you assume a significant amount of new debt.
Sources of disability income protection
If you sustain a disabling injury or illness, there are a number of sources of disability benefits you might be able to tap into. For instance, the government offers disability benefits, as do many employers. You should take the time to understand the benefits that would be available to you through these sources. Just be mindful that there are limitations on the benefits available through these sources and sometimes the benefits won’t be sufficient to meet your income replacement needs. In those instances, you can obtain additional coverage, either through the workplace or on your own.
Workers’ compensation
If you’re employed and you suffer a disabling illness or injury, you might be able to count on workers’ compensation insurance to replace some of your salary. All states require employers to provide workers’ compensation coverage. It typically pays about two-thirds of your pre-disability income. However, it only pays in cases where your illness or injury is related to your work, and the vast majority of long-term disabilities are not job-related.
State disability insurance programs
A few states provide short-term disability coverage—typically for up to six months—that workers pay for through a payroll deduction. They are California, Hawaii, New Jersey, New York and Rhode Island, as well as Puerto Rico. For those who live in these states, this can be an important source of short-term income replacement.
Social Security
The federal government administers a disability insurance program that covers most workers, but qualifying for benefits is far from a sure thing and the payment levels are fairly modest. About 60% of applications for Social Security disability benefits are initially denied6, and the average monthly payment of current beneficiaries is only $1,0637 – barely above the poverty line.
Employer-sponsored coverage
The main source of disability income protection in the United States is coverage provided or sponsored by employers. Many employers provide their employees with group insurance coverage. There are two forms: short-term disability (STD), which replaces a significant percentage of your income for about three months in most cases, and long-term disability (LTD), which typically pays 40% to 60% of your base salary (pretax) for longer periods.
Some companies don’t provide disability coverage but help their employees by giving them the opportunity to purchase coverage on a voluntary basis. With this type of program, employees, rather than the employers, pay the full cost of the coverage. Check with your employer’s human resources department or benefits manager to see what coverage and purchase options your company provides.
Individual disability insurance
The most flexible and reliable source of coverage is an individual disability insurance policy you purchase on your own. A privately owned policy is portable, meaning you won’t have to worry about losing coverage if you change jobs. Generally, most individual plans will pay between 40% and 65% of your pre-disability gross salary. When paid with after-tax dollars, benefits are received income-tax free.
6 LIFE Foundation, 2008
7 Ultimatedisabilityguide.com, 2009
How much disability income insurance do I need?
The first step in looking at your disability income insurance needs is to determine how much money you’ll earn in your lifetime.
Use our calculator to get the answer.
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Your chances of becoming disabled are far greater than your chances of dying. It may surprise you that in December of 2010, there were over 2.5 million disabled workers in their 20s, 30s, and 40s receiving Social Security insurance benefits due to a disability.*
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* Source: Social Security Administration, Disabled Worker Beneficiary Statistics, ssa.gov
