If you are like most people it is likely that your greatest asset is your ability to work and earn an income. When asked, many people consider their home as their greatest asset, and it may certainly be the greatest physical asset. But what happens when you find yourself injured and unable to go about your duties at work? What happens if you stop getting a paycheck? You will soon realize how important it is to be healthy and continue your regular routine in order to get paid.
A Real Life Example
This really came to my attention this weekend when Ben over at Money Smart Life told his readers that he had been diagnosed with carpal tunnel syndrome and is temporarily unable to work. He then mentions how he has short-term disability insurance to help make sure at least some money is still coming in. This is a great example as to how common a disability can be and how it doesn’t have to be a severe accident or injury to keep you off the job.
What Is Disability Insurance?
Disability insurance comes in two forms: short-term and long-term. If your employer provides a reasonable benefits package there is a good chance that part of the benefits include short-term disability coverage. Short-term disability can mean coverage for just a few weeks up to a few years. Long-term disability is not as readily available as a standard benefit through many employers but it typically can be purchased with an additional small premium. Long-term disability will cover you for extended periods beyond your short-term coverage, and in some cases until age 65.
Just because you find that you are covered under your employer’s plan doesn’t mean you’re in the clear. You will also want to check and see how much of your income is actually replaced in the event of a disability. It is common for this coverage to amount to 60% of your standard pay, but you may find it covers even less. If money is already tight it could very well mean that even a 60% replacement would leave you in a financial jam.
Going Beyond Your Employer’s Group Plan
Depending on your financial situation it may make sense to go beyond what your employer offers. Again, if you can still pay the bills on 60% of your income that may be all that is necessary, but if you are the sole breadwinner or your financial obligations would be in jeopardy with this reduced income it could make sense to buy supplemental coverage. Check with your employer first to see if you can add additional coverage through the group plan, but if not you should determine how much money you really need coming in and see if it makes sense to bridge the gap in coverage.
When looking at long-term coverage this will ultimately depend on how long your short-term disability is covered for. Is it two weeks, two months, or two years? If your coverage is only a few weeks it wouldn’t take much to keep you out of commission beyond that period. If it is a longer period of time it may make the requirement for long-term disability unnecessary, but even so there are added benefits of a long-term policy such as electing coverage until age 65 if you suffer a catastrophic illness or injury.
Disability Insurance is a Must For Young Families
If you are are married and especially if you have kids it is important to have at least basic disability insurance. The basic coverage by your employer may be enough, just be sure to understand what is actually covered and for how long, including your spouse’s plan if they also work. The other thing to consider is the likelihood of Social Security disability benefits kicking in. First, you need to have adequate work history in order to even qualify, so younger workers may fail this initial test.
Second, even if you do have sufficient work history, Social Security disability benefits are only paid out if you meet very stringent guidelines. Basically, if you can be re-trained, or work in almost any capacity you are likely to be denied benefits. On top of that, they do not allow partial claims. So just because you can’t do your old job doesn’t mean you can start an eBay business from home to make a few bucks and still collect Social Security benefits.
In the end, Social Security is the last resort for disability coverage that will do little more than keep you from living on the street (and it may not even go that far) in the event of a catastrophic disability.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
really watch what you buy in Insurances as Protective's dealer from Mills Ford Motors in Brainerd Minnesota sold us a disability on our truck purchase in 2006..My husbacnd became perm-total dis vet in 2007..There doing everything not to pay a claim and we are fighting them..They will take your money and not want to pay.There very sly company.We acually were told by a Ford Credit worker that there crooked Insurance company.
We just got long-term disability insurance at work at no cost to us, and I am so grateful. I may still need to look into short-term disability, though. The long-term doesn't kick in for three months, so I'd hate to be stuck without any income for a few months if something happened to me. Until I get that figured out, I'm working on building up my emergency fund.
Great article. There is definately a major lack of preparedness by us X'ers when it comes to disability or other job set back! Nice work.
Check out my book review on Rich Dad Poor Dad for what Kiyosaki has to say about your home being an asset!
Keep up the good work. Check out my blog if you get a chance!
Well that's why it's also wise to develop alternative income streams. That way if you can't do your construction job for example because of an injured back, you can still continue blogging at home to generate income etc. Diversify diversify!
Great wbesite, my sister-inlaw has M.S. and just went on disability with social security and disability from work. She has trouble making ends meet with the high cost of her drugs she has to take. I was looking for info when I came across your website. Thanks, Steve If you need any info on car insurance go to: http://yourcarinsurer.com
It took me 5 years to get Social Security Disability,from 7 Chronic proplems,of March of 2004.I applied on my own,4 times,starting in 1999,i was turned down several times.Please,be sure,you hire a Disability lawyer,theres no way,you will get benefits on your own.I got it,through admin istrative Law Judge,and Vocational Worker,that said,i couldnt do any types of Work.My Disability,Retroactive,went back to 1999,and i recieved,$37 ,000,Plus,Retoactive,till 1999, Monthly cash Benefits,862.00,but its the Medicare,thats value,thats probably $600.00 a Month,in value,Meds,are another 200.00 a Month.I assume the value near $1600.00,and many people,refuse to put in for FICA,do it,and early,in life,i was 49,when i collected,im 52 now,and its a Blessing,the most important thing,in ones life,if there injured,where is the Money,going to come from.? Its imperative,to start early,putting,FICA,in the system. I dont see,what the future, in 10 years will be,but i doubt,it will be like im getting now.Anyhow,good Luck,to everyone,that needs it badly.
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Buying your own disability insurance might actually be a better idea than the employer plan. If you pay for it yourself you have more rights and ability to sue if they decide they don't want to pay your claim. If your under an employer plan your bound by ERISA and it is much harder to sue and actually get what your owed.
Either way check out the insurance company before you decide to depend on this insurance as your safety net. Doing a google search of the insurance company name and disability insurance or look for federal investigations or class action suits are a tip off that the company in question may make your life hell instead of paying your claim.
Thanks for covering this important issue Jeremy.
@Chief Family Officer - My Disability is also at Principal (as is many of my clients). They have a great policy.
Depending on occupation, Illinois Mutual and Assurity Life treats some occupations (usually blue and gray collar)very well.
One of the biggest aspects of Disability Insurance is taxation. If you pay the premium with after tax dollars, then the benefit is income tax free! That makes 60% or 66% of your income stretch much much further! :)
I personally have my insurance through mass mutual. Though in hindsight, I'd probably go with someone cheaper. This is one area where I really wish I did something sooner. Because I had pinched nerve in my back (not a big deal really) and got my insurance after I was diagnosed, my insurance now doesn't cover alot that's related to my spine. If you can get disability as soon as you can to avoid a pre-exisiting condition clause.
@ CFO & Jeremy: Thank you for the suggestions. My husband & I are doing an overhaul of our finances this year so being able to compare different companies will be handy :)
Glad to be an inspiration for one of your blog posts :)
Another great reason to get disability insurance is if you're planning on having a baby and the mom is going to take time off from her job. I know the policy we bought through my company covers this because several co-workers have taken advantage of it.
I couldn't agree with you more. Thankfully, I haven't needed to use my disability insurance but I keep reading that a person is much more likely to need disability insurance rather than life insurance.
@AMMB - My disability insurance is with Principal Life. Haven't needed it so I can't vouch for it working when needed but I trust the agent I bought it from completely.
A lot of companies offer some form of coverage, such as Guardian Life, Northwestern Mutual, Metlife, Mass Mutual, etc. These are the more reputable names in the business outside of AFLAC although there are a lot of smaller companies who offer this as well.
I haven't worked with any of these companies directly so I can't vouch for their rates/service but there are a lot of options available.