What you need to know about disability insurance

You have health insurance and life insurance, which means you and your family are entirely covered should something happen, right?

Wrong.

Suppose you suffer an injury or long-lasting illness that makes it impossible for you to work. While your health insurance coverage will take care of your medical expenses, and your life insurance will provide for your family should the worst happen, you will be facing debt and potential financial instability if you have no way of replacing your income while you are disabled. And according to the website DisabilityCanHappen.org, “just over [a quarter] of today’s 20 year-olds will become disabled before they retire.”

Disability insurance is one of those things that no one ever thinks they need. But you need to know that you could still pay your bills if you were to become temporarily or permanently disabled. Here are the basic facts you need to know about disability insurance:

• Disability insurance will generally cover about 60 percent of your lost income. There are a few additional policies that you can purchase in order to increase the percentage of your earnings you can take home while disabled, but there are no policies that will replace 100 percent.

This is because the insurance companies want you to go back to work as soon as you are able to. With a 100 percent replacement of lost income, what incentive would there be to go back to the grind?

• If your disability insurance is offered through your employer, then you might not be as well covered as you may think. First, most disability insurance through employers is short-term disability, which means you will be covered up to five, or possibly even ten years. If your disability is a permanent one, you would need coverage up until your retirement age, meaning long-term disability. You can purchase long-term coverage on your own in order to supplement your employer’s coverage.

Secondly, if your employer is paying the premium for your disability insurance, then that means you will have to pay taxes on the benefits. Find out how much your insurance will cover, and then do some math to see if that percentage minus taxes will be enough for you to maintain your financial life. If not, you will want to get some supplemental insurance.

• There is a difference between “any occupation” coverage and “own occupation” coverage. The first means that you are covered only if you cannot hold down a job of any kind, including burger-flipping, and being a Wal-Mart greeter. This means that holding any occupation coverage could leave you vulnerable to being denied benefits.

It’s also important to note that some policies will start as own occupation coverage, and then switch to any occupation after a period of time, commonly two years. This could give you time to search for and potentially train for another occupation, but it could also simply mean that you’re up a creek after two years of coverage.

• Depending upon your occupation, it could be difficult to find a policy. The self-employed and those who work in somewhat risky jobs (such as construction work) will often have trouble finding an insurer. For those who are self-employed, like freelancers, consultants, and potentially even small business owners, insurance companies are uncomfortable underwriting their policies because income can be difficult to verify. Once you have been working for at least three years, and have income records for that time, it becomes easier to find an insurer willing to take you on.

• The longer you can hold off before the benefits kick in, the less you’ll have to pay in premiums. Having an emergency fund is incredibly important, and here is yet another reason why you should aim to have the money to pay for at least six months worth of bills. Premiums on disability insurance go down if you can wait for those benefits for 90 or 180 days.

No one thinks that a medical emergency or major injury will happen to them. Unfortunately, we all need to plan for the worst and hope for the best—and having a good disability insurance policy in place is a great way to do that.