• Income Insurance

What is Disability Insurance?

5 min

A steady and reliable income is fundamental to a person's security and an essential component of doing well and being well. The future is uncertain, hence the importance of being prepared for whatever life may bring.

While money isn't everything, income is an essential predictor of an individual's sense of well-being and life satisfaction.

Now, what if a curveball such as disability gets in the way of things? It's grim to think that we are all exposed to becoming ill or disabled, but it's important to consider that possible scenario to keep a relatively smooth flow of achieving our life's goals.

Many people turn to health insurance benefits before considering anything else because it helps them seek medical care when needed. They believe this is more than enough. Many people are unaware, however, that there are insurance products available to cover a portion of their wages if they become sick or disabled and are unable to work.

In fact, according to the Social Security Administration (SSA), 25% of all 20-year-olds will become disabled and unable to work for 90 days or more before they reach the age of 67.

So, what is disability insurance?

In general, disability insurance is a form of income protection that replaces a portion of your pay should you get into a serious accident or develop a health problem that would prevent you from working for months or years on end. When a health-related accident occurs, the focus on recovery becomes a priority over your finances. A backup would therefore be crucial to keep your finances flowing relatively smoothly.

Loss of income due to unfortunate circumstances such as physical accidents or illnesses that lead to temporary or long-term disability involves considerable emotional baggage. And while a short-term halt to your income could potentially appear manageable, in the long run, it will deplete your savings and have a significant impact on your finances.

To help you get started and make the best decision based on your specific needs, here's a breakdown of what you need to know about disability insurance.

First and foremost, you need disability insurance even if you're young and healthy. It's easier to apply for a policy if you are younger and healthier because premiums rise as you get older. And if your health deteriorates, you can struggle to find an affordable policy at all.

A common misconception of disability insurance is that disability is accident-related, when in fact 90% of the claims are actually health and wellness related. The most common claims are cancer, heart problems, back problems, mental nervous and musculoskeletal - health conditions that could affect anyone, at any time, in any workplace.

It's important to note that, for the most part, disability insurance will not replace all of your income. What it will do is provide wage replacement benefits that cover up to 60%-80% of your income which usually go up to a cap or a maximum monthly payout. Although that's 100%, receiving up to 60%-80% of your wage is still better than 0%. Plus, having that income stream can be very important to you and your family, mainly if your family depends on your income. Knowing that money is still coming in while you're recovering can remove a big load off your back.

Still curious about how it actually works? Click here to read up!

How much is disability insurance?

When it comes to disability insurance, the key is to take the time to consider what's right for you. There's no such thing as a one-size-fits-all policy. Everyone's circumstances are different. The amount of disability insurance you need depends on your expenses, your income, and whether you have existing coverage (an individual disability policy or a group long-term disability insurance policy through your employer).

To get a sense of where you're at, calculate your critical monthly expenses and analyze your current revenue, then measure the amount of disability insurance income you'd need to help support your current standard of living.

The average cost of disability insurance (aka premiums) is roughly between 1% and 4% of your annual income. It can vary significantly based on benefit length and amount, age, gender, occupation, and riders. This especially holds true to individual policies. As opposed to group disability insurances, individual disability insurance is flexible because you can tailor it to your own needs—also, group disability coverage is tied to your employer. If you change or lose your job, your coverage can't be transferred.

Individual disability insurance can be your only disability insurance policy (if your employer does not offer a group policy) or it can act as additional disability insurance, which fills in the gap between your employer-sponsored plan and the amount you need to survive financially if you become unable to work due to a health issue.

If you get a long-term policy with a longer elimination period instead of a short-term policy, you would be paying less. A "non-cancellable insurance policy" is also a good option since the insurance provider can't cancel coverage even if health conditions change.

Your age, whether you drink, what you do for a living, and how much money you make all have an impact on how much you pay in premiums per month. Keep in mind that the more you earn, the more it will cost to protect those earnings. And the riskier your job, the higher the disability insurance premiums.

Everyone needs disability insurance, no matter what job they have. And ideally, a long-term one. It's a powerful, fool-proof insurance to have. Protect your income for the long haul, and remember, it's not there to add wealth, but rather to pay the bills and put food on the table if something happens to you.

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