Disability Insurance 101

Disability insurance is coverage that you may be able to live without for years but if you ever need it, you’ll wish you had considered buying it.  I suppose the same could be said for other types of insurance but there is a difference between disability insurance and other types like car insurance or home owners insurance.

If you have some sort of unfortunate event that impacts your posessions and sets you back financially you can always work your way out of it.  However, if you’re injured and unable to work and generate income, then suddenly your ability to dig out of a financial hole and provide for yourself and your family is much more limited.

That’s where disability insurance comes into the picture and why we’re going to talk about it today.

What is Disability Insurance?
Disability insurance is another type of coverage that provides a benefit to you when you become disabled and cannot work. You receive a check based on the policy terms to pay for your living expenses. Just like with car insurance you pay into the “system” until you need to file a claim, then the company pays out the claim according to the coverage.

But disability insurance is an interesting product. When you file a claim for an automobile accident your insurance company has a fairly good idea of how much it is going to cost to make you whole. They know how much a car is going to cost if they had to replace it completely. That limits the amount they need to pay out.

That same is not necessarily true for disability insurance. We’ll get to how it works in a minute.

Why Do You Need Disability Insurance?
Disability insurance is often overlooked which is tragic. You are five times more likely to become disabled than you are to die. What’s sad is that if you’re unprepared for disability it is actually a much more difficult financial hardship for you and your family than death. If you’re disabled you still need food and shelter, and of course these cost money. If you die your costs are limited to your funeral arrangements.

When you combine the need for this type of coverage with a majority of people not being familiar with it you can run into serious financial dilemmas.

How Does Disability Insurance Work?
You send payments in to the insurance company just as you would with any other coverage. When you file a claim the monthly check your receive back from the company is dependent upon the policy. Some policies cover 60% of your gross monthly income. If you were bringing home $3,000 per month before you became disabled you would get a check for $1,800 every month for the length of the policy.

Policy length is determined by the coverage you select. Some companies provide coverage for a limited time frame such as 5 years. Others cover you until you reach retirement age.

Employer Disability Coverage and Additional Coverage
Many employers include basic disability insurance in their benefit package to employees. The coverage is usually up to your base salary; if you work in a job where commission is a significant portion of your pay you’ll need to purchase additional coverage unless you’d like to live off of a portion of your base for the foreseeable future.

When looking to augment employer coverage be wary of various clauses in policies. If your employer provides coverage then you need to find insurance that will work on top of that coverage. If you buy a 60% income replacement policy while your employer provides the same then there is likely to be a clause in your paperwork that says your employer’s coverage must be used rather than the one you purchased on your own.

Disability Insurance Alternatives

If you don’t have any disability coverage through your job then it’s even more important that you look into disability insurance alternatives.

Social Security Disability Insurance

If you’re disabled and not able to work there is a program called Social Security Disability Insurance (SSDI) that you might qualify for.  They base your payments and eligibility for the program on how much and how long you’ve been contributing to Social Security.

One thing to keep in mind about SSDI is that it doesn’t kick in right away if you become disabled so it would be good to have something in place to help pay the bills in the mean time.  Another caveat about SSDI is that it only covers you if you’re fully disabled. If you have a partial or short term disability you won’t qualify for SSDI.

Individual Disability Insurance Policies

You can also buy short term disability policies on your own.  Although these are probably more expensive than a group policy you would purchase through an employer they do have benefits.  For example, most group policies will reduce your benefits based on other sources of disability insurance you’re receiving, such as SSDI. However, most individual policies don’t have this limitation.  Another benefit of an individual policy is that if you switch jobs you keep the same policy, vs employer policies that change when you get a new job.

You definitely want to research the different insurance providers, you can compare disability insurance quotes and see which one makes the most sense for you.  Here are some of the well known providers of disability insurance policies:

• State Farm
• American Family Life Assurance Company of Columbus (AFLAC)
• MetLife
• Northwestern Mutual

Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He's building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, ING Direct, and many others.

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