Becoming disabled can be financially devastating – here’s how to protect yourself.
No one likes to think about life’s what-ifs, but when money rules the world, it’s necessary. So what happens if you become disabled? Unfortunately, your life insurance policy is limited in this situation. Unless you’ve purchased additional riders, it won’t cover your lost income and living expenses.
That’s where disability insurance comes in. Available in short- and long-terms, it can protect your income and safeguard you financially. And while it can be expensive, it makes sense when you consider that a disability covers diseases and chronic conditions, too.
Does life insurance cover a disability?
In a nutshell: No. Most life insurance policies don’t have built-in clauses for disability, meaning your provider won’t pay you if you become disabled. However, you can add certain riders to your policy that’ll kick in to help if you fall seriously ill or become disabled.
Life insurance and disability insurance both provide income protection, but they’re triggered by different circumstances. With life insurance, your policy is paid out to your beneficiaries when you die. In some cases, policyholders can access their life insurance benefits early. Known as living benefits or accelerated death benefits, these are usually restricted to those with terminal illnesses.
On the other hand, disability insurance protects your income while you’re alive. So, if your new disability prevents you from working and earning money, your disability insurance policy pays the benefits directly to you. Unlike life insurance, which pays out a lump sum known as a death benefit, disability insurance pays out a percentage of your former salary weekly or monthly — depending on your policy — that you’re unable to work. It’s the truest form of income replacement.
While it can be expensive, disability insurance is widely offered for a simple reason: Your chance of becoming disabled at some point during your career is higher than you might think. According to the Social Security Administration, approximately one in four 20-year-olds will become disabled before reaching retirement. And disability doesn’t just refer to workplace accidents or incidents that put you in a wheelchair; most disabilities are diseases, such as cancer, or chronic conditions, like multiple sclerosis (MS) and slipped discs.
How can I get disability coverage with a life insurance policy?
Disability insurance offers the most comprehensive coverage. But if you don’t want to — or can’t afford to — purchase a separate policy, you may be able to add disability riders to your life insurance policy.
Life insurance riders allow you to customize your coverage, usually at an extra cost. These two riders can help you if you become disabled:
- Disability income rider. If you’re unable to work due to a disability, your provider pays you a monthly stipend. The fine print of your policy specifies the benefit, which is set at a percentage of the face amount of your policy. For example, if you have a $100,000 policy and the disability income benefit is one percent, the rider will pay you $1,000 a month. Like long-term disability insurance, it replaces your income, but it’s very limited compared to a standalone LTD policy.
- Waiver of premium. This rider doesn’t pay out any money, but it allows you to stop paying your premiums until you’re able to return to work full-time. With this rider, your policy stays in effect, and the term and death benefit don’t change. You’ll have to prove you’re disabled as defined by your policy rider. Life insurance companies have different ideas about what constitutes a disability, so be sure to compare policies before you commit.
What is disability insurance?
Disability insurance pays a part of your salary — usually 50% to 80% — during the times that you’re too ill or injured to work. It protects your income, so you can continue to pay for your living expenses or any other costs that pop up as a result of your disability. For example, you might be prescribed expensive medications or have to hire a nurse for at-home care. If you’re injured or lost a limb, you may need to renovate your home to accommodate a wheelchair or order a custom-built van with hand controls.
There are two main types of disability policies: Short term and long term.
Short-term disability insurance (STD)
This pays a percentage of your income for a short time, usually less than one year, after you’ve used up your sick leave. Typically, STD pays you after a waiting or elimination period of one to seven calendar days from the date of illness or injury. The benefits are paid weekly for between three to six months.
STD can cover:
- A disabling injury — like a broken leg or hand
- Prolonged sickness — like glandular fever
- Pregnancy and maternity leave
According to the Council for Disability Awareness, the average disability lasts 34.6 months, or three years. While STD is cheaper, in many cases, it’s used to supplement long-term disability insurance and provide income protection until that policy begins.
Long-term disability insurance (LTD)
Long-term disability insurance usually lasts 2, 5 or 10 years, or until you reach retirement. It’s measured in years, rather than months, and begins once you’ve used up your employer-granted sick leave and your short-term disability benefits. Typically, there’s a 90- to 180-day waiting period, and can be covered by STD during that time. The benefits are paid monthly.
Typically, LTD is more cost-effective than STD. If you’re seriously ill or injured, it can protect you for the rest of your working life.
LTD can cover:
- Accidental injuries — like brain trauma caused by a car accident
- Musculoskeletal and connective tissue disorders — like osteoarthritis, chronic back pain or a slipped disc in your back
- Cardiovascular disorders — like heart attacks or serious heart conditions
- Circulatory disorders — like coronary artery disease
- Mental illness — like PTSD or major depressive disorder
How much coverage does disability insurance offer?
Unfortunately, it won’t ever match 100% of your salary.
Short-term disability insurance usually pays 80% of your salary, and long-term disability insurance replaces around 60% of your income.
While your salary is taxed, disability benefits aren’t — so the final amount can come pretty close to what you were taking home before your disability.
What about worker’s compensation or Social Security disability insurance?
It can be risky to rely solely on worker’s compensation or government benefits programs. Worker’s compensation is limited to work-related injuries and illnesses, while Social Security disability insurance (SSDI) has strict eligibility requirements. If you’re accepted, the payments are low; in January 2018, the average payout was $1,197 a month. That comes to $14, 364 annually, which is barely above the poverty line of $12,140 for a one-person household.
How do I find affordable disability insurance?
Disability insurance doesn’t come cheap, unless you have a policy through your employer. For an individual long-term disability policy, you can expect to pay 1% to 3% of your annual gross income.
Like all types of insurance, disability policies can be personalized to suit your needs. There are a few ways to lower your disability premiums:
- Decrease the benefit period. The benefit period refers to the time your policy will pay out benefits, and the shorter the period, the cheaper the premium. The longest benefit you can get is until retirement age; for most carriers, that’s 67, though some can go up to age 70. Not everyone needs coverage for their whole working life, so you can cut costs by reducing your benefit period. The average disability lasts three years, so you could consider a benefit period of 5 or 10 years.
- Increase the waiting period. All long-term disability policies have a waiting or elimination period. Basically, this is the time between the start of your disability and when the insurance company begins paying out your benefits. The shorter the waiting period, the more expensive the policy. If you can choose a waiting period of 90 days or longer, you’ll save a significant amount of money. However, in the meantime you’ll need to have the savings to self-insure or have a short-term disability policy in place — which you may be able to get through your employer.
- Reduce the monthly benefit. Long-term disability insurance replaces your take-home income, and the maximum monthly benefit most companies pay is between 60% and 70% of your current gross salary. If you think you can manage with less money, you can lower your monthly benefit, lowering your premium. This can be a risky option, though, as disabilities can be costly.
As always, the best ways to get a good rate are to buy a policy while you’re young and healthy, and to compare providers to make sure you’re getting the most value for your money.
One in four people will experience a disability before they retire — and unless you’ve proactively purchased disability riders, your life insurance policy won’t help. If you rely solely on your income to pay for your living expenses, it’s worth looking into short- or long-term disability insurance. These policies protect your income if something happens and you can no longer work.