Disability Insurance: Important Coverage for Working Adults
Disability insurance, or, rather, the lack of it, is the biggest gap in family insurance coverage. Many people have life insurance to protect their family if they were to die and health insurance to pay their medical bills. Relatively few people, however, have disability insurance, which helps to cover the loss of income due to an inability to work.
Disability insurance provides a source of income to people who are unable to work because of an accident or illness. The maximum amount of coverage is usually limited to about two-thirds (60% to 70%) of a worker's gross income to encourage him or her to return to work instead of living on disability payments. Disability insurance is especially critical for single people whose paycheck provides their only means of support. It is also important for self-employed persons and employees who are not able to accrue employer-paid sick leave.
Some employers provide disability insurance, but it is generally short-term (two years or less) and may replace only a small portion of a worker's salary. Social Security also provides disability benefits to qualified individuals, but there are strict guidelines and at least a six-month waiting period. Worker's compensation provides benefits, but only for job-related disabilities. Since all of these disability income resources have limited benefits and restrictions, an individual policy is recommended.
A key feature of disability insurance is the definition of disability. Own-occupation ("Own-Occ") policies define disability as the inability to work in the particular field or trade you were trained for. For example, bus drivers and flight attendants and doctors all need to use their hands and sight to work. If they have difficulty seeing, or lose the use of an arm, they cannot perform their job duties.
Any-occupation ("Any-Occ") policies define disability as the inability to engage in any type of employment. It is a much more restrictive definition because you are not considered disabled unless there is no type of work that you can do. Social Security uses any Any-Occ definition of disability to qualify people for benefits.
Naturally, Own-Occ policies are more expensive than Any-Occ because they allow people to collect benefits when they could do a different type of job. Policies are also available with a split definition of disability (i.e., a certain number of years of Own-Occ, followed by a switch to Any-Occ) to keep premiums more affordable.
Another key feature of disability policies is the elimination period (a.k.a., "waiting period). This is the number of days, after a disability begins, before benefits are paid. The longer the elimination period (e.g., 90 days versus 30 days), the lower the premium will be for a given amount (e.g., $1,000 per month) of disability insurance. Disability policy costs and features vary, however. It is advisable to follow "The Rule of Three" and compare at least three competing policies before making a purchase.
Two key factors to consider when selecting an elimination period are the adequacy of emergency savings (to replace lost income) and the availability and accrual of employer-paid sick leave. For example, if someone has a secure job, with no plans to leave, and has worked for six years and accumulated 60 sick days, they could easily choose a 60-day elimination period. On the other hand, someone who has no savings or sick leave may want a shorter waiting period, if they can afford it.
A final factor to look for in a disability insurance policy is the length of coverage. Look for a policy that provides protection until age 65 and is noncancellable. This means than coverage will continue until retirement age as long as premiums are paid.