Becoming mentally or physically disabled can mean not being able to work. To avoid financial difficulties that can arise because of disability, people can get disability insurance. This type of insurance gives workers a portion of the income they earned before disability. It can be a financial safety net for those whose livelihoods are dependent on the income they get from work.
How Disability Insurance Works
When an individual becomes disabled and has disability insurance, they may be eligible to receive monthly payments that can be used to cover daily expenses. The ‘may’ is because every policy has different definitions in terms of what they classify as disabled. Reading the fine print before commiting to a policy is imperative for this reason. Before payments can begin, you typically have to file a claim proving you’re disabled and eligible for benefits.
If you do meet the minimum requirements, payments should kick in once your elimination period (the timeframe between your injury and benefit payments) is up. At that time, you receive payments directly and can spend the money as you wish.
Government disability benefit programs, such as Social Security Disability Insurance (SSDI) are also available for individuals who can’t work because of a disability. That said, it may not be enough to meet all financial needs, so there can still be value in also getting an individual disability insurance policy. Also, SSDI can be difficult to qualify for and is usually only approved after an individual can prove they can’t do any income generating work at all. They must also prove their disability will persist for a minimum of 12 months.
In terms of taxes, some disability insurance payments are tax-free, while others are not. It depends on whether premiums are paid with pre or after-tax dollars. Either way, an income tax return should be filed when receiving disability benefits.
Types of disability insurance
There are two main types of disability insurance:
- Short term disability insurance: Short term disability insurance can cover income for up to a year depending on the policy. This type of insurance is for people experiencing short-term illnesses or disabilities and is often offered by employers. It can cover around 60% – 80% of the policy holder’s monthly income.
- Long term disability insurance: Contrary to short-term policies, long-term disability pays the insured income for longer terms, which could be several years or up until a certain age. The length of the coverage depends on the policy terms and agreement. Long-term disability insurance is for people with permanent or long-term disabilities. It is sometimes offered by employers but is more commonly acquired as an individual policy.
How to get disability insurance
There are two primary ways to get disability insurance and that’s through an employer or on your own via the marketplace.
Through Your Employer
Employers may offer both short term or long term disability insurance also known as group disability insurance. Employees can check with the HR department whether their employer offers disability insurance. If so, it’s a good idea to learn about the details of the plan before you potentially need it. Disability benefits that come through an employer disability insurance policy may be liable to taxes. This is especially the case if your employer pays the premiums on the plan.
Through the Marketplace
Even if you have employer coverage, marketplace disability insurance can help supplement that. This may especially be helpful if the employer plan doesn’t have enough coverage.
Disability insurance can be purchased through a broker or financial professional. In terms of cost, a policy holder could pay 1%-3% of their annual income and that’s broken up into monthly premiums. Similar to health insurance, premiums are also influenced by factors like the benefit amount, time period, health, age, and gender.
Before purchasing a plan, think about how much coverage you would need in the event you become disabled, how long you want coverage for, and what you’re willing to pay in premiums. In terms of premiums, plans with more expansive and faster coverage usually cost more. Consider consulting a financial advisor to see how disability insurance may fit into your overall financial plan.
