People ordinarily buy property and casualty insurance to protect their possessions (houses, cars, and furniture) and life insurance to provide income for their survivors. However, many people don't think about protecting their income with disability income insurance. But how well could you live if you weren't able to work? Disability is an unpredictable event, and if you become disabled, your ability to make a living could be restricted. Although you may have enough money in the bank to meet yourshort-term needs, what would happen if you were unable to work for months or even years? The real value of disability income insurance lies in its ability to protect you over the long haul.
A look at the odds
Your need for disability income insurance may be greater than you think. Here are some important disability statistics to consider:
• The Social Security Administration estimates that a 20-year-old worker has a 3 in 10 chance of becoming disabled before reaching retirement age. (Social Security Disability Benefits, SSA Publication Number 05-10029, June, 2012)
• There is a 25 percent likelihood of incurring a disability by age 50, according to the 1985 Commissioner's Individual Disability Table A (the most recent data available)
As these statistics show, your chances of being disabled are great. Of course, statistics can be misleading-you might never become disabled. But then again, how many of your friends and family members have been in car accidents? Disability can be caused by illness as well as injury. How many people do you know who have suffered a heart attack or stroke? If you became ill, how would you support yourself or your family?
What would happen if you became disabled?
What would happen if you suffered an injury or illness and couldn't work for days, months, or even years? If you're single, you may have no other means of support. If you're married, you may be able to rely on your spouse for income, but you probably also have many financial obligations, such as supporting your children and paying your mortgage. Could your spouse really support you and your family? In addition, remember that you don't have to be working in a hazardous occupation to need disability income insurance. Accidents happen not only on the job but also at home, and illness can strike anyone. For these reasons, everyone who works and earns a living should consider purchasing disability income insurance.
But isn't disability coverage through an employer or the government enough?
You might think that you are adequately insured against disability because you have coverage through your employer or through government programs such as Social Security and workers' compensation. However, many employers (especially small employers) do not offer disability benefits, and government programs may pay benefits only if you meet a strict definition of disability. Here's an idea of the benefits you may already have, as well as their limitations:
Social Security: Although you shouldn't overlook the disability benefits you may be eligible to receive from Social Security, you shouldn't rely on them, either. Social Security denies many claims, in part due to its strict definition of disability. Even if you are deemed eligible for benefits, you still won't begin receiving them until at least six months after you become disabled because Social Security imposes a waiting period. In addition, your benefit may replace only a fraction of your predisability income.
Workers' compensation: If you're injured at work or get sick from job-related causes, you may receive some disability benefits from workers' compensation insurance. The amount you receive depends on the state you live in. However, when you review your disability income insurance needs, remember that workers' compensation pays benefits only if your disability is work related, so it offers only limited disability protection. Some states also cover only the diseases or disabilities outlined in that state's workers' compensation laws.
Pension plans: Some government and private pension plans pay disability benefits. Often, these plans pay benefits based on total, permanent disability, or reduce your retirement benefit in proportion to what you have already received for a disability. In addition, remember that these benefits are usually integrated with Social Security or workers' compensation, so your benefit may be less than you expect if you also receive disability income from these government sources.
Long-Term vs. Short-Term Disability Income Insurance
It's hard to imagine becoming disabled, and harder still to imagine a disability lasting longer than a few weeks. But serious disabilities can last years or even a lifetime. That's why you should pay attention to whether a disability income insurance policy offers long-term or short-term disability benefits, and understand the difference between the two.
How do long-term and short-term disability policies differ?
By definition, long-term and short-term disability policies have different purposes. Short-term disability income insurance is designed to pay you benefits sooner and for a shorter period of time than long-term disability income insurance.Under the terms of your disability income insurance policy, you'll have to wait for a certain period of time after you become disabled before you can begin receiving benefits. Some policies (typically short-term policies) even offer two waiting periods--a shorter one for accidents, a longer one for sickness. Waiting periods under short-term policies generally range from 0 to 14 days, depending on the terms of the policy. Waiting periods under long-term policies are longer, ranging from 30 to 720 days, although a 90-day waiting period is most common. If you suffer a disability, you'll receive benefits until you recover or reach a certain maximum. By definition, short-term disability policies may pay benefits for up to two years, although many policies pay benefits for only three months, six months, or one year. But long-term disability policies pay benefits for a far longer period--for a few years, up to age 65, or even for a lifetime.
Should I buy long-term or short-term disability income insurance?
If you can't afford to purchase both, it generally makes more sense to purchase long-term disability coverage. Most disabilities last only a short time, and you may be able to financially survive a short-term disability, even without insurance. However, a long-term disability can seriously threaten your finances if you do not have insurance.
Consider these factors as well:
• The other kinds of protection you have: If you suffer a disability, you may be eligible for benefits from a government-sponsored disability insurance program such as Social Security or workers' compensation (if your disability was work related). Your employer may also provide coverage, although employers offer short-term coverage more frequently than long-term coverage. Don't buy a policy that duplicates coverage you already have elsewhere.
• The type of coverage you can afford to buy: Short-term coverage is typically less expensive than long-term coverage because benefits are paid for a shorter period of time.
How do I buy a short-term or long-term disability income insurance policy?
You can buy disability income insurance through a private company that sells individual policies, or you can purchase group disability insurance through an association to which you belong or through your employer. Employers may also offer you a certain amount of disability insurance at no cost to you as part of your employee benefits package.
This information was developed by Broadridge, an independent third party. It is general in nature, is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Investments and strategies mentioned may not be suitable for all investors. Past performance may not be indicative of future results.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019.