Life insurance

Are you underestimating your need for disability insurance?

You are not the only one who underestimates your chance of being disabled. According to a study done by the Council for Disability Awareness, only 10% of people accurately estimate their chances of becoming disabled. TMA Insurance Trust shares some shocking statistics.

Short-term (“ST”) disability insurance policies provide coverage for six months or less. It is usually better to have cash reserves than to pay a premium for a short-term disability insurance policy. It is, however, much harder to accumulate enough cash reserves to cover a long-term disability. Long-term (“LT”) disability insurance has become a necessity.

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Important distinctions regarding Disability Definitions

Your ability to receive benefits will be affected by how a policy defines “disability”. The two main categories of coverage are “Own occupation” or “any occupation”.

If you are unable to perform the duties of your occupation, “own occupation” policies provide disability benefits. If you are a lawyer and your disability prevents you from being a lawyer, you will be able to receive benefits, even if your health allows you to choose another job.

The “Any occupation” policies are more restrictive. These policies pay benefits only if you can’t work in any “gainful occupation”. For example, if an accountant is unable to work, you could lose your benefits.

Keep in mind, however, that not all occupation policies are created equally.

Your disability benefit will not be affected by the salary you earn while you are disabled under “true occupation” policies.

“Transitional own occupation” insurance policies will pay lower benefits based on the salary you earn if you choose to work while you are disabled. If your disability coverage is $7,000 per month and you are earning $5,000 per month during your disability, then your monthly disability benefits will be reduced by $2,000 under a transitional owner-occupation policy.

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Modified occupation coverage does not allow you to receive disability benefits if your disability is temporary. Even if you are able to work in another job, you cannot still get benefits. However, you will be able to receive benefits once you have actually taken a job.

Main Groups of People: Which Type are You?

Let’s now look at disability insurance policies for three distinct categories: self-employed individuals, those who are not covered by an employer and those who stay-at home parents.

  1. Employer group plans are covered

If you are able to remain in this group, consider yourself lucky. Large employers often offer long-term and short-term disability insurance at no cost to employees. Employer-provided LT Disability policies typically offer benefits between 50% and 60% of your pay. Terms can vary. You will be taxed on any income received when you collect disability benefits even if you don’t pay a premium for the policy.

  1. Individuals who are self-employed and not covered under a group plan

This group is at risk of not receiving adequate disability coverage, or having no coverage at all. Since 2014, I’ve been working for myself and have had the opportunity to purchase disability insurance through two professional companies. Aon offers both life and disability insurance policies to its members. Members can choose between a 13-week and 26-week waiting period within the group policy. The premiums that you pay for extended waiting periods are lower. Members can also choose to be covered for partial disabilities. This policy is more costly because it doesn’t require someone to be out of work completely when they become disabled. It also falls under the true definition of disability: Own-occupation.

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What happens if your profession does not offer group insurance? Although you can purchase an individual LT Disability policy, these policies can be quite expensive and may cost as much as 3% of your income. You can limit the coverage’s duration. You can delay the benefit start date or limit the duration to reduce costs. If the 13-week waiting time with lifetime benefits is too costly, you might consider a policy that has a 26-week waiting window and up to five year of benefits. This strategy is not for everyone. You will need sufficient financial resources to cover the first six months of your disability, as well as any additional five-year-long disability.

  1. Parents who stay at home

To be eligible for disability coverage, you will need to have income. Parents who stay at home aren’t paid for their contributions to the household don’t usually qualify for disability coverage. Instead, focus on maximising the income earner’s coverage for disability insurance.

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  1. Planning is a process

Comprehensive financial planners such as me can discuss disability insurance with clients. Fee-only fiduciary advisors swear to protect their clients’ best interests and receive no compensation for the advice they provide. A NAPFA adviser is a good choice if you have concerns about your insurance coverage or want to get an impartial opinion.