Disability Insurance

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From the checklist for personal finance, I am going to pick up and continue with the second item on the prioritized list – Disability Insurance.

As I mentioned before, I would prefer to write about investing than disability insurance. However, I have gotta plow through this one objectively to make justice to personal finance.

Do you have auto insurance? If you drive a car, you would say, “Duh, I do”. Everyone understands the need for auto insurance.

Did you notice that I have placed disability insurance at a higher priority than life insurance? Do you want to know why?house-insurance-419058_1280

The answer is simple and very logical – if you were todie today, life insurance would pay out to the beneficiary you have listed. The objective of the life insurance is to help your beneficiaries maintain the same standard of living after your death.

If you get disabled today due to an illness or an injury, you have created two problems – (1) you are no longer the provider (2) you become dependent on your dependents. You are not earning a paycheck to provide, and your dependents now need to bear the burden of providing for you.

Case closed – now you know why disability insurance has a higher priority than life insurance.

 

 

There several reputed websites like, Council for Disability Awareness, National Safety Council, and Social Security Administration that share national statistics on disability.

Majority of the short term and long term disability incidents are non work related. Most Americans don’t have adequate coverage either for short term or long term disability.

 

What Is Disability Insurance?

Do you earn a paycheck? If yes, disability insurance is an insurance for your paycheck.

There are two types – Short Term Disability (STD) Insurance and Long Term Disability (LTD) Insurance.

Both replace a portion of your paycheck.

STD provides income protection for up to three months you are disabled from work.

If you are disabled and unable to return to work for a longer period of time, then LTD provides income protection.

 

Short Term Disability (STD) Options

Here are some of my thoughts on short term disability insurance alternatives that may be available to you:

Low Cost Coverage through Employer: If you work for a large corporation, chances are they have a really good deal for you – you just pay a few dollars per paycheck and you get STD coverage.

Workers Compensation: If you are injured or ill and is work related, you might be able to rely on workers compensation to provide a partial portion of your salary. All states in the US require employers to provide some level of workers compensation coverage.

State Coverage: Some states like New Jersey and California provide short term disability coverage for up to six months. You pretty much pay for it in your state income taxes. If you live in a state that provides short term disability coverage, you may not need to purchase it. Check if your state provides short term disability coverage.

Private STD Disability Insurance: You could go out in the market and shop around for short term disability insurance. It will most likely be expensive and I don’t recommend this route.

Emergency Funds: If you have an emergency fund with cash reserves in savings account that could cover six months of your living expenses, you could use that for coverage during your short term disability period.

 

Long Term Disability (LTD) Options

I place more importance to long term disability insurance than STD insurance. 


According to Council for Disability Awareness:

“Accidents are NOT usually the culprit. Back injuries, cancer, heart disease and other illnesses cause the majority of long-term absences.

Are you prepared if it happens to you? Probably not. If you’re like most Americans, you don’t have disability insurance. Or enough emergency savings to last 34.6 months. Yes, that’s the duration of the average long-term disability claim.”


Here are some of my thoughts on long term disability insurance alternatives that may be available to you

Low Cost Coverage through Employer: If you work for a large corporation, chances are they have a really good deal for you – you just pay a few dollars per paycheck and you get LTD coverage.

Workers Compensation: If you are injured or ill and is work related, you might be able to rely on workers compensation to provide a partial portion of your salary. All states in the US require employers to provide some level of workers compensation coverage. If your illness or injury is not work related, you will not qualify for this.

Private LTD Disability Insurance: You could go out in the market and shop around through a site like PolicyGenius for long term disability insurance. You can receive fairly accurate quotes within 5 minutes. LTD Insurance is very affordable and I recommend you to get it if you don’t have LTD insurance.

 

One of the main reasons for bankruptcies and home foreclosures is due to people getting disabled and becoming unable to meet the financial commitments undertaken. Do you have adequate short-term and long-term disability insurance?

 

I am not an insurance agent. Thoughts and opinions are my own. Please consult a professional and in determining your insurance needs. 

 

 

 

 

 

 

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5 thoughts on “Disability Insurance”

  1. I’m not quite sure what the different coverages are for long term disability insurance versus long term care insurance. Wouldn’t they do the same thing?

    1. Hi Ingrid,

      This is great question. A lot of people get confused between Long Term Disability (LTD) Insurance and Long Term Care.

      LTD and LTC are different and don’t do the same thing.

      LTD Insurance – as covered in this post, is to insure your paycheck. LTD will replace a portion of your income (paycheck) should you become disabled and are unable to return to work. In short, LTD provides income replacement because you are unable to return to work due to disability.

      LTC Insurance – LTC pays for all or a portion of care-giving if you are in assisted living or in nursing facilities. It is not meant for income protection. People in their 40’s and 50’s should consider purchasing LTC insurance. That way, when they age, if they need to move into assisted living or need care-giving because they are unable to care for themselves, LTC would pay for all or part of it.

      –Michael

  2. I have a life insurance associated to the mortgage – it is mandatory here. But I don’t have another one or a disability insurance.

    Accidents happen more often than the death :), and after a certain age the statistics indicate that a leg broken can keep you out of work for 2-6 months off.

    I will look into disability insurance and see I can deduct it from taxes or maybe declare it as “professional expense” as a freelancer. I will also check if my employer wants to cover a part.

    Also need to compare how much benefits I have from this or if it is better to invest everything and to manage the disability scenario myself (for example, some friends cancelled almost all insurance and bought a second house and it is rented with a yield of around 8%. Now the rent is covering the mortgage. In the near future, once the mortgage is paid off, all the money could be used in case of disability.

    1. Hi Claudia,

      Good to know that you have life insurance. I am not familiar with laws in Europe and what kind of coverage government provides for disability.

      You understand the need and importance of disability insurance. For STD, if you have adequate personal emergency fund savings, you may not need to purchase it. For LTD, you need to be prepared until your rent income will replace your current income.

      I am glad to see that you are looking into disability insurance.

      –Michael

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