Disability Insurance

Disability Insurance

The most glaring gap I see when it comes to insurance in financial plans is a lack of disability insurance. But in fact, the chance in one's lifetime of needing this coverage is actually greater than the number of life insurance claims that are made. If you're in your 20's, you have more than a 1-in-4 chance of becoming disabled before you retire, according to the Social Security Administration. By contrast, for a 25-year-old male, the probability of dying before age 65 is 1 in 6, according to Life Happens, a consumer education organization. For a 25-year-old woman, the chances of dying before 65 are 1 in 9. The fact that premiums for disability are higher (an individual long-term disability policy will cost about 1.5% to 3% of your gross income, according to the National Association of Health Underwriters) than for life insurance show you that the chances are greater.

When most people hear the term "disability," they think of a birth defect, or an injury caused by an accident. But in fact, 90 percent of long-term disability claims are for illnesses. One of the by-products of modern medicine is that things that used to kill us are now treatable, but often with debilitating results. 

A better description for disability insurance is "income replacement insurance", because that is essentially what you are paying for. This is especially important, because in the case of an untimely death, a person's expenses stop as well. But if you're alive and not earning, your family will still need to feed, house and perhaps care for you for years or even decades, or you'll have to do it yourself.       

The most common kind of disability insurance is the group plan, typically offered through employers. Group plans usually don't come close to replacing your full paycheck, with an average reimbursement rate of about 60 percent. Only a third of private industry workers have access to employer-sponsored coverage, however, according to the Bureau of Labor Statistics. Some employers pay 100 percent of the premiums; some share the cost with employees; and some offer it as a voluntary employee benefit, requiring the employee to pay 100 percent of the premium. This is important to be aware of, because taxation of benefits is dependent on whether the premium was paid with pre-tax or after-tax dollars. If your employer pays for the benefits, then the ongoing payments will be taxes as ordinary income. If you pay, all benefits would be tax free.

If your employer doesn't offer a group plan or you don't like what they're offering, you can shop around yourself. But keep in mind that, without a group, your price is based on your unique situation and needs. Like life insurance, that means individual plans are generally cheaper the younger and healthier you are.  

Even without a work-sponsored plan, you do have some disability coverage through Social Security and Workers' Compensation. Workers' Comp. replaces lost income if an injury or illness occurs on the job, but fewer than five percent of disabling accidents and illnesses are work-related.  As for Social Security, in 2015, the average monthly disability payment was $1,177. 

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