Unfortunately, your life insurance policy doesn’t cover mental or physical disabilities. That’s where disability insurance comes in. Available in short and long terms, this coverage protects your income and can pay for your living expenses if you become disabled.
Does life insurance cover a disability?
In a nutshell, no. Most life insurance policies don’t build in clauses for disability, meaning your provider won’t pay you if you face a sudden impairment to your mental or physical health.
However, you can add disability riders to your policy that kick in to help if you fall seriously ill or face a disability.
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 a disability rider to your life insurance policy.
Life insurance riders allow you to customize your coverage, often at a cost. Providers typically offer two riders:
- Disability income. 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 1%, the rider pays you $1,000 a month. Like long-term disability insurance, it replaces your income, but it’s limited compared to a standalone LTD policy.
- Waiver of premium. This rider doesn’t pay out money. Rather, it allows you to stop paying your premiums until you’re able to return to work full time. With this rider, your policy remains in effect, the term and death benefit unchanged. 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 compare policies before you commit.
What are the alternatives to life insurance with a disability rider?
If you want financial protection for a disability outside of your life insurance policy you have other options:
- Short-term disability. If you aren’t able to work due to an injury or illness this coverage can pay a percentage of your income for up to six months.
- Long-term disability. Depending on which plan you choose, this benefit can pay a percentage of your income up to retirement age while you can’t work.
- Workers’ compensation. Depending on state rules, if you’re injured on the job you may get a portion of your wages paid by your employer.
- Social Security disability. If you meet government requirements this program will pay you a monthly benefit.
- Family and Medical Leave Act. Usually referred to as FMLA, this offers eligible employees unpaid, job-protected leave for qualified reasons, like the birth of a child.
What about workers’ compensation or Social Security disability insurance?
It can be risky to rely solely on workers’ compensation or government benefits programs. Workers’ comp is limited to work-related injuries and illnesses, while Social Security disability insurance (SSDI) has strict eligibility requirements.
And if you qualify, 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.
Life insurance vs disability insurance
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 often 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. It’s considered the truest form of income replacement.
While it can be expensive, disability insurance is widely offered for a simple reason: Your chance of an unexpected disability at some point in your career could be devastating to your career or future earning potential.
In the simplest of terms, your life insurance pays out to your beneficiaries when you die. Disability insurance protects your income and offers financial benefits while you’re alive.
|Life insurance||Disability insurance|
|Pays a death benefit|
|Pays out for full disability|
|Pays for partial disability|
|Offers living benefits|
|Ability to borrow against your policy|
|Lump sum payment|
Benefits of getting both life insurance and disability insurance
If you’re interested in both types of coverage, it’s worth applying at the same time. Here are the benefits:
- Your rates will never be as low as they are today. The longer you wait, the more you’ll pay for a policy. This is because your age and health are the two major factors that underwriters take into account when determining your rates.
- You may only need to take one medical exam. If you’re applying for coverage with the same carrier, you’ll likely be able to use the results from the same medical exam — which is much more convenient.
- Your policies could go into effect at similar times. Depending on your provider, the underwriting process can take anywhere from three to eight weeks. While the application process for life and disability insurance is slightly different, you’ll only need to spend time gathering the paperwork and records once.
- You’re covered during your working years. You’ll be financially prepared for disability, illness or death during the years you may depend on your working income.
Compare life insurance with disability riders
If you rely solely on your income to cover your living expenses, it’s worth looking into short- or long-term disability insurance. These policies protect your income if you become disabled and can no longer work.
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