7 Issues to Consider When Purchasing Disability Insurance
If you currently have a good income but worry about not having enough money in case you become unable to work due to illness or injury, disability insurance could be the solution. To ensure you get the right policy that meets your needs and is cost-effective, consider these seven important factors when purchasing disability insurance. This article will guide you through how to choose the right policy to bridge an income gap if you become disabled.
Disability Insurance: Key Considerations
Understanding these seven points can help you find a disability insurance policy that fits your specific circumstances.
1. What is Disability Insurance?
Disability insurance provides benefits when you can't work because of illness or injury. Most policies replace a percentage of your income, covering your basic financial needs, like bills and daily living expenses, until you can return to work. However, disability insurance is different from health insurance—it doesn't cover medical bills. To start looking for disability insurance, determine your minimum financial needs, or your "minimum to thrive" number, in case you become unable to work.
2. Should You Get Disability Coverage?
If you're the primary earner in your family and your income would stop if you become ill or injured, you should consider disability insurance. Government statistics show that one in four 20-year-olds will become disabled before reaching retirement age. This statistic highlights the importance of protecting yourself and your family with disability insurance.
3. Differences Between Short and Long-Term Disability Insurance
There are two main types of disability insurance: short-term and long-term. Short-term disability insurance typically lasts between 3 to 6 months, sometimes up to a year, covering about 60% to 80% of your monthly gross income. Premiums usually range from 1% to 3% of your annual income, and payouts generally start within two weeks, which is helpful in emergencies.
Long-term disability insurance can pay benefits for several years or until your disability ends, even if that's when you retire. These policies usually cover 40% to 60% of your monthly gross income, with some covering up to 70%. Long-term policies also cost 1% to 3% of your yearly income but are more cost-effective in the long run. However, payouts can take up to 6 months, so having emergency savings to cover short-term needs is recommended.
4. What is 'Portability'?
If you buy disability insurance through your workplace, check if you can keep it if you leave the company. Non-portable insurance ends when you leave the job, whereas portable policies cover you no matter where you work. If portability is important, consider purchasing disability insurance independently rather than through your employer.
5. Renewal Options for Disability Policies
A "guaranteed renewal" policy allows you to renew without changes to your coverage, but premiums can vary. A "non-cancelable" policy means your coverage and premiums remain the same as long as you pay on time. Additionally, find out if premiums are waived during a qualified disability. The best policies are both non-cancelable and guaranteed renewable, though they may cost more.
6. Cost of Living Benefits
Most policies don't include cost of living benefits, but adding this rider can provide financial stability by increasing your benefit to match the rising cost of living. This is particularly important during times of high inflation. Choose policies that increase on a compounding basis to help your benefits keep pace with inflation, even after your disability ends.
7. Future Increase Rider
A future increase rider allows you to increase your policy’s monthly benefit as your income grows, regardless of your health status. Without it, your benefits remain based on your income when you first got coverage. However, insurance companies often limit the total supplementary coverage added each year with this rider.
Choosing the Right Coverage
When shopping for disability insurance, work with an insurance agent who can compare different companies and help you choose the best policy based on your budget, age, health, and other factors. Remember, you need to have the policy in place before any illness or injury occurs, as you can't purchase disability insurance to cover an existing condition.
If you need assistance or a referral to a trusted insurance agent, professionals can offer objective advice to help you decide on the best coverage for you and your loved ones. For those needing a review of their legal and financial choices, scheduling a planning session can provide valuable guidance.
This article is a service of Zarda Law, S.C. We do not just draft documents; we ensure you make informed decisions about life and death, for yourself and the people you love. That's why we offer Legacy Planning Session, during which you will get financially organized and make all the best choices for the people you love. You can begin by scheduling a Legacy Planning Session and mention this article to find out how to get this $750 session at no charge.
