Why Disability Insurance Matters

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Insurance helps protect you against future financial strain. But with so many types of insurance available, it’s important to understand the purpose of each option.

For instance, disability insurance protects your income in the event you’re injured or sick and can’t work. Much like home or auto insurance covers a portion of the cost of replacing a hail-damaged roof or wrecked vehicle, disability insurance replaces some of the income you’d otherwise earn.

Here’s a look at why disability insurance matters, the different types offered, and the benefits of securing coverage.

What Is Disability Insurance?

Disability insurance is designed to protect you from the financial stress associated with missing work due to a covered disability. If you stop receiving a paycheck because you can’t work, your disability insurance policy replaces a portion of your missed earnings.

The amount of coverage depends on the contract you purchase, generally falling between 50 and 80 percent of your normal salary.

Why Disability Insurance Matters

The Social Security Administration estimates that 25 percent of workers will experience a disability at some point between age 20 and retirement. Although certain employer or governmental protections are in place, the reality is that these protections have shortcomings. They often don’t provide adequate coverage when someone is missing their income.

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Worker’s Compensation Has Varying Limits

Also known as “worker’s comp,” this program is designed to compensate people who are hurt on the job. Each state determines its own benefit limits, and its maximum payouts may not be adequate for you. Also, it only applies if you’re hurt because of your job. It doesn’t cover your lost wages if you’re hurt from nonwork-related reasons.

Social Security Disability Income Is Restrictive

Social Security Disability Income (SSDI) is more stringent than typical disability insurance policies. To qualify for benefits, you must show that you can only perform minimal or no gainful work due to your injury or medical condition and that this has been or is expected to be the case for at least a year.

You may be unable to earn an income for many reasons but don’t qualify for benefits through worker’s comp or SSDI. A disability insurance policy can help close that coverage gap.

Types of Disability Insurance

You can obtain disability insurance as part of a group plan through your employer if it provides that benefit. You can also purchase an individual policy on your own. Policies are typically either short term or long term.

Short-Term Disability

Short-term disability policies generally begin providing benefits within two weeks of your injury. Depending on your policy, you may receive benefits for a few months or up to a year.

Long-Term Disability

Long-term disability policies require you to wait longer, such as three to four months, before benefits begin. However, you also receive benefits for a longer period—sometimes even for decades.

Because these policies each provide unique coverage for specific circumstances, you may want to have both. A short-term policy can provide benefits immediately, while a long-term policy can protect you if your disability persists.

Benefits of Disability Insurance

All types of insurance exist to protect you from risk. In the case of disability insurance, the risk is that you might become sick or injured and experience a loss of income.

Think about how you use your regular income. This might include:

  • Monthly mortgage or rent payments
  • Food, utilities, and other general living expenses
  • A family that relies on you for financial support

A disability policy can reduce financial strain and allow you to focus on recovering. What’s more, if you pay your premiums out of pocket with after-tax dollars, your disability benefits may not be taxable. That means you may not need to replace 100 percent of your earnings to maintain the same standard of living.

Is Disability Insurance Right for You?

You may want to consider disability insurance as part of your financial plan, especially if you’re in your prime working years and have financial obligations. Assess your individual situation and future expectations when deciding whether to purchase a policy. If you have questions, consider reaching out to a financial professional to learn more.

Insurers and their representatives are not permitted by law to offer tax or legal advice. The general and educational information here supports the sales, marketing or service of insurance policies. Based upon individuals’ particular circumstances and objectives, they should seek specific advice from their own qualified and duly-licensed independent tax or legal advisors.

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