Disability insurance is one of the most important insurances you need for long-term financial success. When I worked as a financial advisor, I recommended appropriate risk management strategies that included disability insurance as well.
Disability insurance pays a portion of your income during the disability.
It is also known as income protection because it protects your income during an illness or an accident.
Types of Disability Insurance
The two basic types of disability insurance are: short-term disability and long-term disability.
Short-term disability is exactly what it says, for the short-term. You usually have a waiting period of between 0 to 30 days before the insurance kicks in and generally a maximum benefit period of 24 months.
The waiting period depends on your policy but is usually a minimum of 30 days to 180 days. The income protection benefit can last as little as 2 to 5 years or until age 65.
Types of Disability Insurance Policies
The three types of disability insurance policies are conditionally renewable, non-cancelable, and guaranteed renewable.
Conditionally Renewable Policy
In the type of policy the insurance rates can increase or your disability coverage can be terminated at any time by the insurer. So it’s best to avoid these types of policies.
This is a policy that cannot be canceled by your insurance company, except for nonpayment of premiums. It is annually renewable without increase in premiums or loss of benefits. This is the best option for disability insurance.
Your policy will stay in force as long as your premiums are paid while your insurance is guaranteed renewable. However, your premiums can increase in the future based on any past claims for injury or illness.
Disability Insurance Offerings
There are two types of disability insurance policies, group disability, provided through your employer and an individual personal policy that you acquire yourself.
Group Disability Insurance
If this is offered at work, it is recommended you take advantage of it. This is because group disability insurance doesn’t make you go through an underwriting process, as well as getting the insurance at a discounted group rates.
Remember that once you file a disability claim, it takes anywhere from a few days to several weeks for the disability claim paperwork to be processed and for you to get your first disability check. Usually the coverage amount is only 60 to 65% of your income and after taxes you might be left with only 45% to 55% of your income. Can you survive and maintain your standard of living at 45% to 55% off your income.
Herein, I urge you to strongly evaluate disability insurance thru work.
Personal Individual Disability Insurance
The purchase of an individual disability insurance policy can enhance your income protection up to 70% to 80% of your income meaning that in conjunction with your group policy, you may be able to receive up to 80% off your income.
Unlike disability benefits through a group plan which are taxed, the disability income you receive through an independent policy is tax-free. Remember if a disability were to occur you would rapidly cannibalize your financial resources rather quickly.
Disability Insurance Benefits
Hopefully I have helped you understand the importance of and benefits of disability insurance. If a disability were to occur by having income protection you can avoid consuming all of your finances and meet your daily expenses and regular expenses. You can maintain your standard of living even during the disability depending on how much protection you have.