Job Loss Protection Packet
In This Article
- What Is Disability Insurance?
- How Does Disability Insurance Work?
- Short Term vs Long Term Disability Insurance: What’s the Difference?
- How Much Will Disability Insurance Pay?
- How Much Does Disability Insurance Cost?
- What Qualifies as a Disability for Disability Insurance?
- Is there underwriting for disability insurance?
- How to Access Disability Insurance
- Taxability of Disability Insurance
- Which Disability Insurance is Right for You?
- What Is Job Loss Insurance and How Does It Work?
- The Bottom Line: Is Disability Insurance Worth Getting?
Auto insurance, home insurance, life insurance… if it makes good sense to insure the most important items in our lives, doesn’t it make sense to insure your job income?
That’s where disability insurance comes in.
Suppose you’re having a great day at work and suddenly something happens to your health — an accident, an illness — that requires you to leave work for a while or even permanently? You’re probably too young to begin using your retirement plan, and life insurance won’t help with an illness.
Disability insurance helps you rest easier when these unexpected moments in life occur.
Because disability insurance can be complex — short term, long term, and terms like an elimination period, coverage amount, repayment and more.
In this article, we’ll help you answer the question “what is disability insurance” so that you can decide if it's right for you.
What Is Disability Insurance?
One form of income protection insurance is disability insurance.
Disability insurance comes in two major forms in the United States:
- short-term disability insurance
- long-term disability insurance
Sometimes disability insurance is offered as a benefit by employers the way some employers pay for life insurance.
Most likely, though, it will be offered as an optional benefit or as a separate policy you’ll have to buy on your own.
How Does Disability Insurance Work?
Short-term disability insurance will typically cover you for 9 to 52 weeks with a waiting period of up to 14 days, depending on your policy. During this time you may have to go without pay or dip into your paid time off before receiving any short-term disability payments.
What is Covered by Disability Insurance?
Disability insurance does not provide any form of healthcare payments.
It is only a means of receiving a portion of your base salary if you’re unable to work for a lengthy period of time for approved health reasons.
Short Term vs Long Term Disability Insurance: What’s the Difference?
There are many differences between short-term disability and long-term disability. These include:
As we’ve mentioned, the Elimination Period for short-term disability is usually around 14 days. It’s usually 90 days for long-term disability.
The percentage of your insured income varies between short-term and long-term disability.
The duration of the benefits is less for short-term disability than it is for long-term disability.
Definition of Disability
Short-term and long-term disabilities have slightly different definitions of disabilities.
Thus, there is a need for the two disability insurance categories.
Long-term disability (LTD) policies usually have a provision that requires you to apply for Social Security Disability Insurance (SSDI).
Once you have, and get approved for SSDI, your combined LTD and SSDI income cannot exceed the amount of the LTD income protection you purchased.
Let’s say you purchased 50% of your income value when you enrolled in long term disability, and that equals $3,000 per month.
Your Social Security contributions over the years have earned you a monthly income of $2,500.
In addition, you received a check for $25,000, which represents $2,500 per month for the ten months you waited for approval for SSDI.
This check is considered backpay.
Now, because of the SSDI approval, you’ve suddenly exceeded the 50% of your salary that you had purchased, and your LTD company has already paid you in full for the ten months that SSDI just paid you.
Your LTD policy will state that you have to repay the LTD company for this overage.
You will owe them part of the backpay you received to repay them for the ten months you were already paid.
In addition, you cannot continue to receive $3,000 per month from the LTD and $2,500 from SSDI because this exceeds 50% of your income.
In this example, the LTD company will reduce their payment to you to $500 so that your total monthly disability income from them and SSDI is back to $3,000, or 50% of your income.
How Much Will Disability Insurance Pay?
Short Term Disability
Short-term disability benefits probably won’t replace your full paycheck. They’ll typically only cover 40 to 80 percent of your base pay.
Long Term Disability
Depending on your policy, long-term disability insurance may cover you for a couple of years or until you hit a predetermined retirement age.
Like short-term disability insurance, long-term disability insurance only replaces a percentage of your base pay.
Unlike short-term disability insurance, that percentage rarely exceeds 60 percent.
How Much Does Disability Insurance Cost?
If a disability is included in your work benefits, you’ll pay nothing. Otherwise, the pricing for both short-term disability insurance and long-term disability insurance vary.
Note: if an employer offers disability insurance but doesn’t pay for it, the rates are whatever the benefits program states.
You have the freedom to window shop if you’re buying disability insurance on your own. A few items can affect the premiums of privately purchased policies:
- your health
- your occupation
- your salary
- the benefits you choose
Both short and long-term disability insurance cost about the same amount, typically 1-3% of your annual income.
The important thing is finding a policy that fits your specific needs.
What Qualifies as a Disability for Disability Insurance?
Short term and long term disability insurances have different qualifications for disabilities.
For example, a short term disability may include pregnancy or rehabilitation from surgery expected to last from a few weeks to a few months.
Long term disabilities can last for life. These might be life-changing injuries from an accident or illnesses and diseases which require long-term healthcare.
In both short term and long term disability, the employee must be unable to do their current job, and their doctor must be the one who determines this.
Is there underwriting for disability insurance?
Yes, there is underwriting, and this may be one of the biggest misconceptions about disability insurance.
Although you purchase the insurance, you must still apply for the benefits you purchased by submitting the required documentation to the disability company.
If you are approved, you will begin receiving the benefits per the terms of your contract.
How to Access Disability Insurance
The process for accessing disability insurance is simple if you receive it through your employer. In most cases, all you’ll need to do is sign up during your benefits open enrollment period.
Buying short or long-term disability insurance privately is a bit trickier. Luckily, there’s a simple step-by-step you can follow.
First, you’ll need to decide what type of coverage you want on your policy— do you want coverage for a few weeks or a few years? Do you want to be covered based on loss of any income or based on loss of a specific occupation?
Next, get quotes from different insurance providers in order to scout out the best deal for you.
Once you find a company you’re happy with, apply for disability insurance.
In the application, you’ll need to share some information about yourself.
Here’s what you’ll need to apply:
Know Your Medical History
You’ll have to share information about your medical history so the insurer can determine if you have any pre-existing conditions that would stop you from accessing disability insurance.
For example, illnesses caused by addiction to drugs or alcohol will not qualify you for coverage.
If you pass the application part of the process, you’ll then go through a medical exam to double check your health and medical information.
Verify Your Income
The insurance company will also request that you verify your income with pay stubs, W-2s, or a tax return.
Once everything is settled, you’ll get a copy of your policy which you must sign and return to the insurer to complete the process.
Taxability of Disability Insurance
Depending on how you pay for your disability insurance, the benefit payments could be either taxable or non-taxable.
You’ll need to pay taxes on your disability insurance if it’s covered through your work — meaning that either your employer pays the premium or you pay out of your paycheck with pre-tax dollars.
The exception here is if your employer adds the cost of disability insurance to your total income.
If they do this, you’ll pay taxes on the extra income but the disability insurance proceeds will be non-taxable.
If you make your payments with post-tax dollars, your disability income will be non-taxable.
Consult with a tax professional to determine the taxability of your particular disability insurance.
Which Disability Insurance is Right for You?
It often makes more sense to buy long-term disability insurance over short-term disability insurance. That being said, both types of insurance have their perks.
Short-term disability insurance is helpful in the event of an accident or illness that will leave you temporarily disabled — think post-surgery recovery time or a bad flu.
Short-term disability will cover anything that will stop you from working for a little while with the expectation that you’ll return to work once you’re all better.
One of the upsides of short-term disability is that it is more common than long-term disability, which means you’ll have a better chance at a claim.
The total payout is limited by the policy and will only last for a certain period of time.
If you’re good at saving, you may want to opt for an emergency fund over short-term disability insurance. It will likely be just as helpful when it comes to covering you and you won’t need to worry about premiums.
Long-term disability insurance, on the other hand, could provide you with income for decades should you become permanently disabled. Long-term disabilities are typically more serious.
They include conditions like:
- traumatic brain injuries
- mental disorders
Of course, the length of the payout will be determined by the policy you choose and your specific disability. It’s worth it though.
The need to replace income if you’re permanently disabled and can never return to work is far more serious than replacing your income due to a temporary disability.
What Is Job Loss Insurance and How Does It Work?
The Bottom Line: Is Disability Insurance Worth Getting?
Disability Insurance can be a complex topic, but a simple solution to those in need.
Again, if it makes good sense to insure our automobiles, homes, and lives, then it certainly makes sense to insure as much of your income as possible.
It’s a small investment compared to the peace of mind it brings should you ever need it.
However, you need to do your due diligence and shop around as you should before any purchase.
You need to be familiar with terms and conditions of the policy you decide to buy.
Having a good understanding of your obligations should you ever have to use disability insurance will help eliminate any surprises you might otherwise have, and help you only pay for what you need.