Disability Income Insurance: Protecting Your Most Valuable Asset

Have you ever wondered how you would manage financially if you were to sustain an injury or illness that left you unable to work? How long could you maintain your standard of living, pay your bills, and cover your daily expenses? The likelihood of such an event may be greater than you think. According to the Council for Disability Awareness (2013), Americans underestimate their chances of experiencing a long-term disability: 64% of working Americans believe they have a 2% or less chance of being disabled for 3 months or more during their working years; however, the reality is that the odds of experiencing a long-term disability are about 25%.

To be prepared for such a situation, it is important to plan ahead. To help protect yourself, you may wish to purchase an individual disability income insurance policy, which would replace a portion of your income in the event that you experience a qualifying disability. Consider the following when choosing among the coverage options:

• Definition of Disability. Carefully review the policy’s definition of disability. Some policies may provide coverage if you are unable to work in the occupation in which you were employed or for which you were trained, or if you can no longer earn as much as you once did in that field. In contrast, other policies may offer coverage only if you are unable to work in any occupation. In other words, if you were to sustain a disability but were able to work in a lower skilled, lower paying job, you may not receive benefits.
• Residual Benefits or Partial Disability Coverage. Under specific circumstances, if you become disabled and are only able to earn a portion of your previous income, residual or partial disability coverage pays a percentage of your benefits.
• Guaranteed Renewable. With this feature, the insurer cannot refuse to renew your policy prior to the policy expiration date or change any terms, except for premium cost, as long as you continue to pay your premiums on time.
• Guaranteed Insurability. This provision allows you to increase your coverage amount, even if you experience health changes that would otherwise prevent you from obtaining additional disability coverage.
• Cost-of-Living Adjustment (COLA). This feature helps protect your benefits against the effects of inflation during a long-term disability.

The Outlook without Protection

Without a disability income insurance policy in place, there are alternatives, but they come with shortcomings. For instance, you could self-insure. But, even if you save 10% of your salary each year, one year of disability could easily deplete many years of savings. Or, perhaps your employer provides group disability insurance. Unfortunately, employer-sponsored plans are often limited in scope and duration, and generally coverage is not portable upon termination of employment. Workers compensation may be an option if an injury occurs on the job. However, eligibility and benefits vary by state.

To qualify for Social Security disability benefits, specific criteria must be met, and you may have to wait several months for payments to begin. Social Security disability was not intended to be an individual’s sole source of disability income. Benefits are often less than what is needed to cover living expenses.

An illness or injury that reduces or eliminates your primary source of income can be a financially challenging experience. Therefore, you may want to consider disability income insurance as part of your overall financial strategy. Be sure to consult with a qualified professional.