If you’re one of the millions of Americans living paycheck-to-paycheck, and most of us are, an accident or illness that leaves you unexpectedly unable to work can leave you unable to pay for your living expenses and result in financial devastation. For this reason alone, disability insurance is an important coverage many people don’t have enough of, if any.
Cost is a commonly cited reason for the lack of disability coverage, especially for those in higher-risk occupations. Other factors that affect rates include the benefit amount selected, age, and personal health history. Considering the protection provided by disability insurance, a premium amounting to 3% or less of your income can be a relatively small investment; how would you financially survive if you became unable to work? For more on why disability protection matters, see The Importance of Disability Insurance.
Most experts agree that adequate coverage starts with a policy providing a minimum of 60% of your gross income while you’re disabled. Because many disability premiums are paid with after-tax dollars, the benefits are often tax-free; a policy that provides about 60% of your pre-tax income generally approximates your existing paycheck.
The policy waiting period (elimination period) is a major factor in rates. Premiums are usually significantly lower if you can afford to wait 90 days after becoming disabled to begin collecting benefits. Remember that this delay means you’ll need personal savings to cover expenses while waiting for benefits to start. The maximum benefit period also affects the rate: policies that pay only until age 65 can cost less, but you should expect to have sufficient retirement income when the benefit period ends. For details on short-term options and waiting periods, review Understanding Short-Term Disability Insurance.
When comparing disability policies, pay close attention to how the policy defines “disability.” Some policies pay only for a total disability that prevents you from working any job. Partial disability protection pays a portion of lost income if you can only work part-time during your recovery, and that feature can be important for many workers.
Also check whether the policy is guaranteed renewable and non-cancelable; with those features the carrier can’t cancel the policy or raise your premium because of a change in your health. Look for an inflation rider (cost-of-living adjustment) for long-term disabilities and consider a future insurability rider, which lets you buy additional coverage later regardless of health changes. Some carriers offer transition benefits to ease the return-to-work phase. For examples of profession-specific coverage options, see Celebrity or Spokesperson Death, Disability or Disgrace Insurance.
If you’re unsure which options fit your situation or how much coverage you need, talk to an agent.
Frequently Asked Questions
How much of my income should disability insurance replace?
Most advisers recommend a policy that replaces at least 60% of your pre-tax income to approximate your take-home pay, since benefits are usually tax-free. Your individual needs may vary based on expenses and other income.
Are disability insurance benefits taxable?
Benefits from a policy you pay for with after-tax dollars are generally tax-free; benefits from an employer-paid plan may be taxable. Check your policy details or consult a tax professional for specifics.
What is the waiting (elimination) period?
The waiting period is the time between becoming disabled and when benefits start; common options are 30, 60, or 90 days, and longer waits reduce premiums but require more savings to bridge the gap.
Should I buy partial disability coverage?
Partial disability coverage can replace a portion of lost income if you can only work part-time after an illness or injury, and it’s worth considering if your job can be done on a reduced schedule.