How to Protect Your Ability to Earn (For Less)

Disability insurance tips

No one can accurately predict the future.  No matter how many tarot cards, fortune cookies, magic 8-balls, or Ouija boards you might stock up on, making accurate predictions about exactly what’s going to happen ten, five, or even a year down the road is, well, pretty darn difficult.  If not downright impossible.   There are just too many random events, haphazard scenarios, and chance encounters that can change things in an instant.

And that’s exactly what makes insurance so valuable: it provides important peace-of-mind protection against the risks of everyday life.

The threat of a potentially expensive car accident didn’t keep me from driving to the grocery store yesterday because I know I have a policy that protects me in case anything goes wrong.

I don’t live in fear of a flooded basement doing a number on my personal balance sheet because I know that – aside from a maybe a slight bump in my premiums – the financial carnage really won’t be all that bad.

That’s the beauty of insurance.  We pay a little over time to avoid the really big, potentially life-altering costs that come with incidents like a totaled car or expensive-but-necessary medical procedure.

In the last part of our three-post series on insurance coverage, I’ll be examining  a really important insurance option that tends to slip under the radar of many consumers: disability insurance.

What Is Disability Insurance?
Disability insurance is a coverage that pays benefits that cover all or a part of your salary at work in the event you miss time due to illness or injury.

Unlike life insurance, which generally boils down to the presence of dependents in your life, disability insurance is a good idea for anyone who relies on the money from their paycheck to pay bills or contribute to savings.  And because that’s pretty much everyone, I’m not going to far out on a limb to say it’s probably in your best interest to protect your ability to earn with some form of disability insurance.

Make sure you’re covered in the short-term
Like the name implies, short-term disability usually covers accidents or illness that might keep you from working in the here-and-now.  Benefits generally kick-in after a month or so and – depending on the plan – can cover loss of income for anywhere from 6 months to a year.

Although it’s important to have a short-term plan, there are several ways you could go about covering yourself:

– About half of employers offer some form of short term coverage.  And although many businesses are cutting back benefits, make sure you check with your HR department before you buying a policy that would result in double-payment.

– Use your paid leave.  While it’s not the best strategy if you end up missing a long stretch of work, filling in the weeks or months you’re absent due to an accident or illness with paid vacation or sick days can be a viable bridge to an extended disability plan.  Fortunately, with more and more employers adopting a Paid Time Off approach that allows employees to  “bank” unused vacation or sick days, if your attendance is good, using paid leave as a disability bridge is become a more viable self-insurance option.

– If you’re hurt on the job, you could be eligible for worker’s compensation benefits.  Indiana, for examples, offers employees that are injured at work two-thirds pay for up to 52 weeks.

-You could tap into an emergency fund.  A form of self-insurance, emergency funds keep you from having to pay premiums on a short-term disability plan.  If you have the savings on hand to handle the benefits provided by a typical short-term disability plan – say two-thirds of your salary for up to six months – then it might make sense to self-fund a short term plan.

And don’t neglect long-term

One in four twenty-somethings will become disabled by the time they retire.  That underscores the importance of having a solid, long-term disability policy.  Especially if you have dependents or a lot of debt that would threaten your financial stability in the event you were unable to return to work.

Unlike short-term disability, a long-term accident or illness is difficult to cover with sick-days or self-insurance.  Common coverage options include:

– Public Insurance.  Social Security Disability Benefits are available to people with a long-term disability that will prevent employment and work history in a job that qualifies for social security.

There’s a lot more to the program than that description, but this is a blog post, not a technical manual.  To learn more about what Social Security Disability Benefits cover, check out this primer from the Social Security Administration.

-Group Plans.  Group insurance coverage is provided by your employer and generally covers between 40% and 60% of an employee’s take home pay.  If you want additional coverage, you can obtain a supplementary plan that will bridge from what your group plan covers to your full salary.

Nearly half of all employers offer some form of disability in their benefits package, so be sure to  check at work before you apply for individual coverage.

– Private Plans.  The downside to many group plans is that benefits generally only pay out up to a certain portion of your actual compensation – usually in the 40% to 60% range.  Additional fine print in your plan might put a monthly or yearly cap on the amount of money you can collect.

Private disability plans generally cost more than group options, but provide much greater flexibility to create a plan with benefits that compensate you appropriately.  In addition, you can port your plan from company to company without having to worry about receiving benefits if become disabled while you’re unemployed or between jobs.

The Wrap-Up
Disability insurance is a type of coverage that slips under the radar for many consumers.  But given the risks – 25% of twenty year olds will become disabled before they retire – it’s a valuable safety net to have in place.

So make sure you’re covered both short- and long-term.  And always read the fine print on your policy.  Some coverages might not pay out the kind of benefits you anticipate, potentially leaving you in a financial bind if a long-term accident or illness occurs.

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