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.