Most of us expect to work until we voluntarily retire from the workforce. But there are any number of things that can and do prevent people from working: severe accidents, life-threatening illnesses like cancer, or memory loss from Alzheimer’s disease. It’s a long list that’s not fun to think about. Fortunately, there are both short-term and long-term disability insurance policies that can help protect you financially.
What Does “Disabled” Mean?
A wide range of conditions might qualify you for disability benefits. If you’re unable to perform your regular duties more than 15% of the time you’re at work, or you must miss more than 10% of your scheduled work time, you may qualify for disability support. In most cases, you must have solid medical evidence to prove your disability before collecting benefits.
Short Term vs. Long Term
If it’s expected that you’ll recover from your condition within a year or two, that’s generally considered a short-term disability. However, if doctors believe your disability will last longer or is permanent, that may be considered a long-term disability. Short-term policies typically start paying benefits faster — roughly 0-14 days after approval — and benefits might continue for up to two years. Long-term disability policies often have a longer waiting period, but the payments usually cover a more extended period of time.
SSI and SSDI
There are two Social Security programs that provide disability benefits: SSI and SSDI. SSI is a needs-based program for those with lower incomes that the Social Security Administration manages, but its funding is not from the Social Security Trust Fund. Applicants need not have worked or paid Social Security taxes, but they must not have assets worth more than $2,000 ($3,000 for a couple) and earn below a certain threshold of income.
SSDI is a program for those who have a work history that includes paying Social Security (FICA) taxes and generally offers higher benefits than SSI. The longer you work and the more FICA taxes you pay, the higher your benefits can be. However, applicants can’t collect benefits until after a five-month waiting period.
If you’re employed full time, you may have disability benefits provided by your employer. In California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico, employers must provide short-term disability insurance. Even if you’re in one of those states, however, you may want to purchase supplemental insurance. Check with your human resources department and make sure you understand your costs, the level of benefits promised, the waiting period before you can claim benefits, and the length of time you can receive benefits.
If your employer doesn’t provide disability insurance, consider purchasing a private policy. Ask the same questions as above. In addition, you want to know the strength of the insurance company (AM Best rates the health of insurance companies) and the conditions that govern the policy. Know whether your policy is non-cancelable (renews at the same price each year and can only be terminated if you don’t pay your premiums) — or whether it is guaranteed renewable (can’t be cancelled but can go up in price). Also ask whether the benefits are guaranteed for some limited number of years, or until your retirement age, or for life.
Is Disability Insurance Right For Me?
Like all insurance, you’re making a wager. You’re betting that, at some point, you might be out of work long enough to need financial help. The insurance company is betting that you won’t. The cost of the policy depends on how the insurance company views those chances and the options you select. Higher benefit levels and longer coverage raise the price.
For help deciding what kind of coverage you might need, set up an appointment with your financial advisor. Have a list of questions, such as how likely you think it is you’ll need disability payments, how much income you’d need and the coverage period you desire. Understanding your options now can help prevent panic decisions later.