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Imagine something happened to you today that prevented you from working for the next two years. Maybe you discover you’ve got a disease, like cancer, or maybe you slip on your front steps and break your back.
If you have health insurance (I hope you do), your doctor and hospital bills will be mostly paid. That’s a relief, but if you’re unable to work, what will you do for income? The answer for many is disability insurance.
Here’s this week’s question:
I am 64 years old and still working. Is it to my advantage to get long-term disability insurance? — Ted
Who needs disability insurance?
The answer to this question is simple: You want disability insurance if the loss of your income would be catastrophic for you or your family. Unfortunately, however, like most forms of insurance, while it’s nice to have, it may not be so appealing when you see how much it costs.
Here’s how to approach it.
See what you’re eligible for now
While most people think of Social Security as a retirement plan, it’s also a disability plan. If you’ve worked and paid into the Social Security system for at least five of the last 10 years, you’re eligible.
Unfortunately, getting disability benefits from Social Security isn’t a walk in the park. You have to be unable to work in any capacity for at least a year, or be terminal. About 60 percent of applicants are denied, and the average payout is just 40 percent of pre-disability income. You can read more about the qualification process at this page of the Social Security website.
You should also check with your employer. Some automatically provide disability coverage at no cost. Others will pay part of the premium or might allow you to buy it through them at group (discounted) rates.
Either way, you’ll need to understand what those policies do.
Understanding disability coverage
Disability insurance comes in two types — short term and long term.
- Short term. If you’re unable to work for a relatively short time, typically six months or less, these policies will replace a percentage of your income, up to 100 percent, after all your sick leave is gone.
- Long term. If you’re out of work longer than six months, you’ll receive 50 percent to 70 percent of your salary. You can buy coverage for a certain period, say 10 years, or until you reach retirement age. Obviously, the length of time, as well as the amount of income replaced, will affect the price. These policies will also require applying for Social Security disability, and payments will be reduced by amounts received from that.
Many employers offer disability insurance for their employees. But plans vary greatly, and some may not offer what you’d consider adequate coverage. In addition, disability payouts from an employer’s policy are subject to taxes, while payouts from individual policies are not.
Nevertheless, you should always review anything available through your employer before considering individual coverage. Individual disability coverage is generally much more expensive and typically requires a physical. And you’ll likely find exclusions for any pre-existing conditions, as well as disability due to injuries suffered during activities considered to be dangerous, such as skydiving.
How to shop for disability insurance
It’s normally better to shop insurance through a broker representing more than one company, rather than approaching individual companies. But before you begin shopping, learn some terms and think about what you need. Then price it.
Things to look for:
- “Own occupation.” There are two kinds of disability — the kind where you can’t work at all, and the kind where you can’t do your specific job. For instance, if I lost my voice, I could work, but probably not in television news. Obviously, “own occupation” is more expensive. And be aware, some policies might start as “own occupation,” then switch to “any occupation” a couple of years later.
- Length of coverage. As I mentioned above, the best, and most expensive, policy is one that takes you all the way to retirement.
- When it starts. The longer you’re able to wait before the payments kick in, the lower the cost. A policy that doesn’t take effect until one year after a disability will be a lot cheaper than one that kicks in in three months. (This is why having an emergency fund is essential.)
- The amount of the benefit. This should go without saying, but I’ll say it anyway: The more income the policy is replacing, the more it will cost. Keep in mind that if you’re paying for the policy, the benefits will be nontaxable. So, depending on your tax bracket, a policy that replaces 70 percent of your income could come close to matching your existing take-home pay.
- Guaranteed renewable. This means you’re guaranteed to be able to keep your coverage as long as you pay the premiums. For example, you buy a policy and are then diagnosed with high blood pressure. Your disability company can’t kick you off the policy because you may now be more likely to become disabled.
Now, back to Ted’s question: “I am 64 years old and still working. Is it to my advantage to get long-term disability insurance?” The answer, Ted, is that if the loss of your income would imperil your family, disability insurance might come in handy. But because you’re so close to Social Security age, you’d probably be hard-pressed to find a policy. Especially an affordable one.
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