Is Disability Insurance Worth it?
Disability insurance is an insurance policy that will pay out monthly benefits to you in the event you become too injured or sick to work. While most people consider disabilities to be catastrophic events like paralysis, most disability cases are a result of illness or soft injury. Depression, cancer, pregnancy, heart disease, back pain, digestive disorders, mental health disorders including substance abuse, and muscle sprains are all examples of common disabilities in the workforce.
Is disability insurance worth it?
In most professions, I think the debate can be unclear whether or not having disability insurance is worth it. If you sprain your ankle or experience back pain, for example, most office jobs can easily accommodate that and you will be ineligible to qualify for benefits. In the construction industry however, these can put you out of work for weeks, months, or even years.
Disability insurance is about mitigating risk. Working in a physically demanding job is risky, when a slight injury can cause you to lose a significant amount of money. Becoming disabled is not that unlikely of an event either, as the Social Security Administration put out a report stating that “Just over 1 in 4 of today’s 20 year-olds will become disabled before reaching age 67.”
If you’re someone who can not pay the bills while not working, which is almost everyone, disability insurance is an affordable way to guarantee that you will be able to pay rent and take care of your family, in sickness and in health. No one thinks they need insurance, until they do.
Short Term Vs. Long Term Disability
When obtaining disability insurance, you usually either obtain short term or long term disability insurance, although sometimes both! Short term disability is intended to provide benefits for a term between 3 -12 months depending on the plan, and covers up to 70% of your income. Long term disability on the other hand provides benefits for anywhere from 5 years, or all the way to retirement age, and pays out 40-70%, again depending on your plan.
It’s important to note that these payments are based on gross income, and if you pay the premiums yourself, they are not taxed. So a short term benefit of 70% of your gross income may be the same amount you were seeing on your checks before. If your employer pays for the insurance as part of your salary package however, the paid benefits will likely be considered taxable by the IRS.
It is generally recommended to obtain long term disability insurance over short term, as ideally you would have an emergency fund that would be able to cover short term losses of income. For incidents that cause you to miss out on years of income however, long term disability would be your better choice.
State Disability Insurance (SDI)
If you live and work in California, Hawaii, New Jersey, New York, or Rhode Island, you have State Disability Insurance (SDI), which is a form of short term disability. Employers in Hawaii or New York can choose to pay for the cost of the insurance, or pass the cost onto the employee. You can see the cost of insurance and the maximum weekly benefit of each state below. If you do not think the benefit amount is enough to cover your bills (Ahem… New York), supplemental short term disability insurance is recommended.
|Wage Deduction||Maximum Weekly Benefits|
|New Jersey||0.47% Gross||$903|
|New York||$0.60 / Week||$170|
|Rhode Island||1.3% Gross||$887|
Obtaining disability insurance
If you do not live in one of the above states, the first place you should look for disability insurance is through your employer. Many employers or union health and welfare funds have options to obtain this insurance at a discounted price. If one is not offered, you can look into getting private disability insurance through providers like Breeze or Guardian Life.
How much does it cost?
The price of disability insurance varies per plan. You could get long term disability insurance as cheap as $20 a month, or ones that go over $100 a month, depending on what level of coverage you wish to choose.
How do I qualify for disability insurance?
Short Term Disability
To qualify for short term disability, you generally need to be unable to do your normal work for at least 8 days before you qualify for benefits. From there, you need to be under the care of a physician until you are able to go back to work.
Long Term Disability
To qualify for long term disability, you have to be totally disabled through the waiting period, which is generally around 60-90 days. To be considered totally disabled, you need to have a sickness or injury that;
- Starts while the policy is active,
- Requires continuous physician’s care unless the physician certifies maximum recovery (I.E You lost both your arms and your physician certifies that no, they will not grow back.)
- For the first two years, keeps you from performing the substantial and material duties of your own occupation.
- After benefits have been paid for two years, it keeps you from performing the substantial and material duties of any gainful occupation that fits you by education, training, or experience, and replaces at least 60 percent of your prior monthly income.
For example, if you are an electrician and become totally disabled and are not able to perform your job you would qualify for long term disability after the waiting period. You would receive benefits for two years, and would only be able to continue collecting these benefits after those two years if you do not have training or experience in another job, or if that new job does not replace at least 60% of your previous income.
If you qualify for benefits past the two year mark, you would be able to collect these benefits for as long as your benefit period lasts, and as long as you are considered totally disabled. This benefit period can be anywhere from 5 years or until retirement age. The longer the benefit period you choose, the higher the premium.