Monday, May 27, 2013

Why You Need Disability Insurance

May is Disability Insurance Awareness Month. Many people do not have adequate insurance including disability insurance. Disability insurance is used if you have a short-term or long-term medical condition that prevents you from working and ensures that you still continue to receive a paycheck. Many people go into debt due to medical bills or health issues and some are forced to file bankruptcy or lose their home to foreclosure. It also helps since the economy is not as stable as it once was.

Disability insurance is a form of protection against income loss and should provide enough to reimburse for loss of income. You are considered disabled if you cannot perform your occupation. It depends on your situation but most people can get disability coverage for the cost of approximately 1% to 3% of their annual salary.

You may not see the immediate benefit of buying disability insurance now but in the long run you will be glad you did. Buying disability insurance will save you money in the future and help you get over any financial crisis you may experience due to loss of income.  Here are 3 benefits to having disability insurance:

1.      Can be used to reimburse income loss
2.      Protects against a financial crisis
3.      Saves you money in the future

If you currently have disability insurance get a free analysis of your existing coverage to see if you have the right amount of coverage. When buying disability insurance it is best to comparison shop and get at least 3 quotes. You can search the Better Business Bureau website for companies and view their reliability report or do a search on the internet for companies. If you are able to purchase disability insurance it is best to purchase a policy with the same company you currently have policies with to save money as a bundled package. If you purchase an individual plan compare the coverage offered and the length of the elimination period. Questions to consider before purchasing disability insurance:

  • Do you have an emergency fund to cover your monthly bills and expenses for 9-12 months?
  • Is your savings is marked for a long-term financial goal and cannot be used for any other purpose.
  • You owe large amounts of debt or pay monthly payments that have large balances such as mortgage, car, credit cards, etc.
  • You are the sole bread winner in your family.
  • You will be laid off soon or will lose benefits or income soon

You can purchase disability insurance on your own which have higher premiums and vary by company and state.  Your employer provided disability payments will be reduced if you receive Social Security disability benefits, Worker’s Compensation benefit, veteran’s benefits and disability benefits from another employer. Employer plans are for non-work related disabilities but may not cover all employees and require meeting certain qualifications such as hours worked per week, length of employment, etc. The longer your length of employment the more paid sick leave you will receive. In California employers must pay up to 52 weeks of short-term disability.

There are 2 main types of disability insurance: short-term and long term.  Short-term disability insurance is used if you are unable to work because of a non-work related injury or illness or pregnancy and replaces part of your income. Short-term disability benefits last up to 26 weeks and usually pay 60% of an employee’s salary.

Long-term disability is defined as being unable to perform your occupation for 2 years. Long-term disability insurance commences once short-term disability ends and provides up to 70%-80% of an employee’s salary with a maximum benefit which varies by employer.  The benefit usually covers an individual for up to 24 months.

Unfortunately when you leave an employer your disability policy does not transfer.  However, some companies offer the option of purchasing an individual plan usually at a much high premium.  An individual disability policy provides protection for business owners due to a non-work related injury or illness. Benefit payment periods can range from 2 years to lifetime. 

But an individual plan will stay with you for as long as you keep the plan and the benefit payment is not reduced by additional benefits received such as Social Security. Some companies that offer individual plans are MetLife, Northwestern Mutual and UnumProvident.  Purchasing an individual disability policy will protect your savings and assets and prevent you from incurring additional debt.

If you earn 6 figures or more some companies offer high limit disability policies.  Disability policy benefits normally pay a maximum of $25,000 each month.  A High Limit Disability policy pays 65% of income regardless of your salary and ranges from $2,000 to $100,000 per month.  This type of policy is a supplement to existing disability coverage.

Business owners should purchase disability insurance especially if there business is designated as a sole proprietor or if they are a key asset in running the day-to-day operations of their business.  A key person disability insurance policy provides benefits to protect the company from financial hardship that may result from the loss of a key employee due to a disability.  The policy provides cash flow to help a company remain stable and continue to grow and defrays any future business costs.

A Business Overhead Expense disability policy provides reimbursement for overhead expenses if the owner becomes disabled.  Benefits include paying: accounting, billing, business insurance premiums, business rent or mortgage payments, utilities, leasing costs, laundry, maintenance, collection service fees, employee salaries, employee benefits, property tax, and other monthly expenses.

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