It might seem unlikely, but what would you do if you found yourself disabled, sick or injured and unable to work for a period of time? You might have an emergency fund in place, but how long would it be before you have drained your resources? If you don't have an emergency fund, how long would your personal savings last?
If you are doubtful that your savings would last as long as you might need, disability income insurance could be a viable option. The future doesn't have to be all doom and gloom, but it helps to be prepared for the uncertainties of life. Disability income insurance could help you face future challenges and give you a sense of security today.
What Is Individual Disability Income Insurance?
Disability income insurance is designed to replace a portion of a worker's earned income if he or she becomes disabled and cannot work. According to the National Association of Health Underwriters, disability insurance is designed to replace anywhere from 45 to 65 percent of your gross income on a tax-free basis (if the policy is purchased with after-tax dollars), should an accident or illness keep you from earning an income in your occupation (or any occupation, depending on the contract).
Let's imagine that you are married with four young children and your spouse stays at home to care for your family. What would happen if you fell ill and couldn't return to work for six months? Maybe you only have a few thousand dollars saved in your emergency fund and have exhausted all of your sick leave. How would you manage to pay your mortgage, taxes, utility bills, groceries, car insurance — and more — during that period of time?
Why Should You Consider Disability Income Insurance?
If you had disability income insurance in place, you would be able to receive periodic payments that could help cover part of your lost income — and help make your emergency fund last a little longer. Now, not every disability insurance policy is created equal. When searching for the right plan, your financial standing, lifestyle and expenses could play an important role in determining your individual needs.
Knowing the answers to the following could help you consider your disability income insurance needs:
- How strongly does your family rely on your income? A single parent supporting two kids could have a greater need for disability income insurance than, say, two working parents with two kids.
- How long could your family continue to pay expenses from your emergency fund? Do you have enough in your emergency fund to cover all of your expenses?
- Which expenses are fixed and essential — and which might be delayed or reduced during a period of disability? Maybe you could skip the weekly restaurant dinner or stretch out the weekly house cleaning to biweekly or monthly.
- Would you continue to participate in and be covered by your employer group health plan — or would you eventually need to convert to an individual policy?
- Would you need to hire someone to mow your lawn or drive you to appointments during a period of disability? Outside help for tasks you normally complete yourself could increase your expenses.
Any Special Considerations?
Insurance companies often have varying definitions of total disability. Therefore, weighing your options could help you select the plan that is right for you. The strictest definition of total disability states that an injury or illness causes the afflicted individual not to be able to engage in "any occupation." Another definition states that an injury or illness causes the afflicted individual to not be able to engage in his or her "own occupation." For example, if a right-handed dentist injures his right hand in an accident, he could obtain disability income insurance even if he is able to engage in other work in the dental industry.
Benefit periods are generally payable to age 65 — which is the age of retirement for many people — or it could be shorter, starting at a two-year benefit period. Another factor to consider is the elimination period or waiting period. This is the number of days at the start of the disability when no benefits are paid out to the insured. It could be 30, 60 or 90 days until you start receiving payments from the insurance company. You'll need to factor in whether you have enough savings to cover you during the elimination period. The longer the elimination period, the less expensive the disability income insurance could be — but the risk involved in this case is something you could consider for your particular situation.
So, is disability income insurance right for you? Remember, life doesn't always work out the way you plan — but preparing for the unexpected could help make all the difference.