If you're faced with an unexpected disability, it can take a long time to financially recover. Beyond the emotional and physical impact of unforeseen disability, injuries or illness can take a toll on your finances. These can have a long-lasting effect on your ability to succeed at your job and earn money. Your employer may offer sick time and a few weeks of short-term disability. But what if you still can't work after that?
You can protect yourself from the financial effects of these situations with long-term disability insurance. Most people have car insurance, yet 60 percent of working adults in the United States don't have coverage to protect their most valuable asset – the ability to earn a living.
Are You Covered?
Check with your employer to see if you have long-term disability coverage. If you do, make sure you know how well you're covered. You don't want to wait until you really need the benefits to discover gaps in your insurance.
Does your benefit calculation include Social Security payments? Your policy may assume you will get Social Security disability payments in determining how much to pay out in case of a claim. But Social Security only pays benefits if your disability will last more than 12 months or lead to death. There is a waiting period of five months before you qualify and then another month before you receive benefits. If you have short-term disability coverage for the first 12 weeks, there could be several months of potentially unpaid time.
Usually, you will receive benefits for as long as you are disabled. But there are certain circumstances that could change your eligibility for disability benefits. For example, if you choose to go back to work and support yourself that way rather than depending on disability benefits, you may stop receiving benefits. Or if you recover your health so that you're no longer disabled, your benefits may also be reevaluated going forward for future coverage. If you choose to go back to work or your health improves, you are responsible for letting your insurance company know.
Policies vary considerably. Make sure you know how well you are covered so that you can prepare around your policy. If your benefits are limited, you should save up more in your emergency fund. RGCU can review your policy and make sure it is adequate.
- Benefit Amount – Disability insurance pays only 60 percent of your current income. It's designed to be enough to cover your base expenses without offering incentive for people to abuse the system. If your employer pays your premiums as an employee benefit, the disability payments you receive will be taxable. If you pay your own premiums, your disability payments will be tax-free.
- Term of Benefits – Check how long your benefits will be paid. Some policies will only cover you for two years. Others provide lifelong benefits. Most policies are somewhere in between. You can lower your premiums by reducing the term of your benefits.
- Premium – The amount you or your employer will pay for your coverage depends on a range of factors including your age, gender, job, income, medical history and lifestyle.
- Non-cancelable – If your policy is non-cancelable, your employer can't terminate your policy or raise your rates unless he or she stops covering your entire job class.
- Guaranteed Renewable – Your employer can't terminate your policy unless he or she stops covering your entire job class, but the employer can raise your rates.
- Own Occupation – This is an important designation on your policy that determines what it means to be disabled. "Own occupation" means that you're disabled when you're unable to perform your current job. "Any occupation" means that you're disabled when you can't perform any job.
- Elimination Period – The elimination period is how long you'll wait after you are disabled to start receiving benefits. All policies have at least a 30-day waiting period. Otherwise, if you missed one day from work, your employer would have to pay you for that day. But other policies will wait even longer to start paying – 60, 90 or even 120 days. The longer the elimination period, the lower the premium.