You and your family face a significant financial risk if, as the breadwinner, you become totally disabled and are unable to work.
You can protect against this risk, but it will require some initiative on your part. In most cases, you should not assume that government programs will provide the financial assistance you may need. Social Security Disability Insurance (SSDI), Workers’ Compensation Disability Insurance and the few state disability insurance programs either are difficult to qualify for or don’t replace enough income when you are disabled and unable to work.
Private disability income insurance is another alternative. With advance planning, you can purchase this kind of insurance to provide the income replacement you need. Private insurance can be used both to supplement public disability income programs for those who are eligible and to provide some disability income for the many who are not eligible.
You can be privately insured in either of two ways. You may choose to be covered under a group disability insurance policy, if your employer offers such a plan. This option offers inexpensive disability income insurance protection. Sometime the employer pays the entire premium; sometimes the employer pays part and the employee pays the rest.
If your employer does not offer this kind of plan, you can purchase an individual disability income insurance policy on your own. This option is more expensive because you will be paying the entire premium without help from your employer. But, this investment will prevent a financial disaster if you become disabled and are not able to earn an income.
You have a choice between short term and long term disability insurance. Short term disability insurance provides you with partial income replacement, but only for a short period of time – usually less than a year, although it can be for as long as five years. Long term disability insurance provides you with partial income replacement often for as long as your normal retirement date. You can roll the dice and just purchase the short term insurance. But since you are insuring against loss of income, you will often be wise to purchase the long term coverage if you can afford it.
The following chart summarizes the similarities and differences between short and long term group and individual disability insurance.
| |
GROUP |
INDIVIDUAL |
| |
Long Term |
Short Term |
Long Term |
Short Term |
| Benefit Start |
1-30 days after disability |
90-180 days |
7-30 days |
30-90 days |
| Benefit End |
90-180 days after disability |
Age 65 |
2-5 years |
Age 65 or lifetime |
| Premiums |
Often less expensive than individual. Rates can change each year. Often paid by the employer with an employee contribution. |
Often more expensive than group. Rates are often guaranteed so premiums usually start higher but stay the same each year. |
| Benefits |
Benefits increase annually with salary. Benefits are tied to salary, such as 60% of pay; often overtime, bonuses and commissions are not covered. Benefits are reduced for Social Security and workers’Compensation. |
Benefits fixed at issue. Overtime, bonuses and commissions may be eligible for coverage. Benefits are not usually reduced for Social Security or workers’ compensation
|
| Portability |
Employee may lose coverage when employment terminates (some employer plans let you take your policy with you)
|
Coverage continues if you change employers |
| Tax Treatment |
Usually premiums are tax deductible while benefits are taxable
|
Usually premiums are not tax deductible while benefits are tax free
|
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