Disability insurance is often referred to as the, “forgotten insurance.” As its nickname suggests, disability insurance is often overlooked or underappreciated until it is necessary. According to the Huffington Post, government studies show that a 20-year-old worker has a 30 percent chance of becoming disabled before reaching full retirement age. Yet only about a third of employees in private industry have long-term disability insurance, according to the Bureau of Labor Statistics. In 2009, more than 15 million Americans experienced a disability that prevented them from working.
In many cases, disability is often misunderstood. Disability insurance protects from a loss of income due to an accident or illness. Let’s look at an example:
Bill is a 47 year old married man with 4 teenage children. He works full time and makes a decent living. At a recent doctor’s appointment, Bill received devastating news that he has stage 3 prostate cancer. This diagnosis will require him to take extended leave from work for treatment and make him unable to maintain his current position in the company.
Disability insurance will replace Bill’s income, but only after three to six months of not working. The insurance payments are made through a combination of the Social Security Administration, employers and private insurers. Because of this, there are very strict definitions of disability and it can take two years or more to be approved for benefits.
In the meantime, Bill’s family is forced to pay for their monthly expenses, on top of medical bills, traveling to and from the hospital, and additional expenses incurred as a result of Bill’s illness without any insurance payments.
Many employers offer disability coverage through a group plan, which pays a specified portion of your salary. The financial effects of insufficient disability insurance can be devastating to the typical American family. To confirm whether or not your policy is active and sufficient, follow these steps:
- Check with your employer to see what the disability benefit is. A typical group plan replaces just 40 percent to 60 percent of your salary, up to a maximum $5,000 a month or $60,000 a year. If the employer pays your premiums, the checks will be taxable.
- Check your plan to see how long benefits last. Generally, benefits can last for either a set number of years or until retirement age. Group policies often limit the duration of benefits to only two years if you can't perform your job duties.
- If your policy looks insufficient, ask your employer whether you can pay for additional coverage. Otherwise, consider getting extra insurance from a private insurer to extend the duration or bring the coverage up to 70 percent or 80 percent of income.
- Consider your long-term income needs. In the event of a disability, your policy should work within your larger financial plan to provide a steady stream of income - so you don't need to dip into your retirement nest egg.