money

How to Insure Against Disability and Job Loss

Lance Cothern

WealthFit Contributor

We’re all fine until we’re not. It’s not pleasant to think about, but it’s important to be prepared for the diagnosis or freak accident that could leave you jobless. There are a lot of things we take for granted— don’t let your earning potential be one of them!

If you’re like most Americans, you’ve probably insured your home and your cars — maybe even your life. But there’s one big asset you’re probably forgetting, and it’s with you all the time: your earning potential. Your earning potential could be worth millions of dollars, and you’re leaving it unprotected like a phone with no case.

Since you rely on your future income, doesn’t it make sense for you to insure your future earning potential? Though it’s not a pleasant thought, it’s important to prepare in the case something happens that makes it impossible for you to work.

The best way to protect against health-related issues that may force you to take time off work is by creating better health habits, which includes eating healthy, sleeping right and exercising.

The best way to protect against accidents and other unforeseen circumstances is disability and job loss insurance, which are options in the United States.

A combination of both will give you the best chance of insuring your earning potential — now and in the future.

Here’s a quick overview of what disability insurance and job loss insurance are and what you need to know about them.

What Is Disability Insurance and How Does It Work?

Disability insurance comes in two major forms in the United States: short-term disability insurance and 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.

Coverage

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.

Also, 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 won’t cover you in the short-term but it will kick in after you’ve been disabled for a longer period of time— typically 30 days to a couple of years. Depending on your policy, long-term disability insurance may payout 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.

Pricing

If 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. Your health, your occupation, your salary, and the benefits you choose can affect premiums of privately purchased policies.

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.

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 downside? 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, cancer, or 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?

Job loss insurance is rare in the United States. While you may qualify for unemployment benefits from the State or Federal Government, this is not a position anybody wants to be in. So what can you do?

Unemployment insurance, or supplemental unemployment insurance, is an insurance policy that you can buy for yourself to substitute your paycheck if you lose your job. Typically, this insurance will allow you some extra cash on top of unemployment benefits from the State or Federal Government. One company, SafetyNet, currently offers private insurance against unemployment— but only in certain states. You could call it layoff insurance. Currently, SafetyNet policies are available in the following states:

  • Colorado
  • Georgia
  • Iowa
  • Michigan
  • Mississippi
  • Missouri
  • North Carolina
  • Oklahoma
  • South Carolina
  • Wisconsin

Coverage

Insurance of the variety offered by SafetyNet is uncommon. SafetyNet defines job loss as “Job loss due to layoff, business closing, job elimination, or other employer-initiated separation, unless specifically excluded,” and offers a lump sum payment ranging from $1.5K to $9K in the event you lose your job or become disabled and are unable to work. They will pay once for disability and once for job loss in one policy year and offer a lifetime maximum benefit of $24K.

They also have a lengthy list of exclusions on their website. SafetyNet ensures that the specific policy you sign up for includes a full list of exclusions and defines what is and what is not covered by this type of insurance.

Pricing

When you sign up for SafetyNet, you sign up for an annual policy and make monthly payments to SafetyNet from $4.50 to $60 per month depending on your coverage and the state you live in.

Unfortunately, this type of job loss insurance is only a band-aid fix. SafetyNet only offers lump sum payment options. It isn’t going to pay your rent—or even your grocery bills— for long, so you’ll need to prioritize returning to work or getting a new job to refill your pockets.

Taxability of Unemployment Insurance

Unlike disability claims, SafetyNet issues a 1099 to unemployment claimants. This means that the income through this policy is taxable.

When Should You Consider Job Loss Insurance?

Ideally, you want an emergency fund to cover the expenses from disability or job loss. After all, money in the bank is the best income protection against short-term injuries or illnesses. That being said, disability and unemployment insurance can help you rest easy knowing you can pay the bills and avoid debt while you build up your emergency fund.

Do You Need Income Protection Insurance?

Now that you know your options, you can decide if you’re ready to insure your earning potential. It may make sense to buy short-term disability, long-term disability, and job loss insurance as protection against unemployment.

Sit down with a financial advisor and discuss these options. If you’re somebody who’s good at saving, an emergency fund is probably the move. If not? That’s fine. Disability and layoff insurance could be just the thing you need.

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Written By

Lance Cothern

Lance Cothern is a freelance writer and founder of the personal finance blog Money Manifesto.

Read more about Lance

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