When you start your career, getting laid off may be the only interruption in work you fear. But about a quarter of Americans will face a year-long period of unemployment due to disability before they retire, according to the Social Security Administration.
While workers’ comp or Social Security disability benefits could help should you become injured and unable to work, each comes with stipulations that may make you ineligible—and leave you without income.
Put simply: unless you’re injured at your job or become ill as a result of working there, you probably won’t be eligible for workers’ compensation. Your employer must also carry worker’s compensation insurance. And you must meet your state’s deadline for reporting the injury or sickness and filing a workers’ compensation claim.
If you are seriously injured or ill and cannot work, you may be eligible for Social Security disability benefits, but there’s no guarantee.
From 2005 to 2016, the Social Security Administration only approved about a third of disability claims it received. Even if you pass the stringent requirements to receive Social Security disability benefits—namely that you are determined unable to work any kind of job for at least a year—you’ll have to wait at least five months after being declared eligible to receive benefits, according to the Social Security Administration. And once those paychecks start coming in, you may find they don’t meet your financial needs: the average Social Security disability benefit payout is just over $1,100 a month, which is just above the federal poverty level. That can leave many people with a significant income gap.
Considering most Americans can’t handle even a $1,000 emergency expense, an illness or injury sidelining them from work could be financially ruinous. That’s where disability insurance comes in.
Disability insurance provides you with a percentage of your income (usually 40 to 70 percent) in the event that you are unable to work. Although it might seem odd that you can’t get coverage replacing 100 percent of your income, plans offering 60 to 70 percent of your income may come pretty close to matching your take-home pay. That’s because disability benefits are paid out tax-free as long as they were purchased with after-tax dollars.
Disability insurance comes in two primary flavors: short-term and long-term. Both may be available to you through your workplace benefits plan, though you can also buy either independently.
Regardless of the type, disability insurance generally works much like other insurance in your life. For a set monthly fee called a premium, you get assurance that you’ll still receive at least part of your income should you become unable to work due to illness or injury.
It may help to think of disability insurance as life insurance for the living. Both provide financial safety nets for those who depend on your income if injury, illness or death prevents you from working.
As the name implies, short-term disability insurance provides payments for the short-term, usually the first three to six months you’re unable to work.
Long-term disability insurance, on the other hand, can keep paying for more than five years after you become incapacitated—and may even continue until you reach retirement age. The catch here is that long-term disability insurance payouts often won’t kick in right away. There’s typically a 60- to 90-day waiting period after you’ve filled out the necessary paperwork before benefits kick in—or even longer, depending on the time period you choose when you select the policy.
If you would be unable to meet your financial obligations (that means rent/mortgage, loan repayment, childcare, groceries and the like) for long without your income, you might want to consider long-term disability at least.
While some people’s emergency funds might be able to cover the three to six months of missing pay that short-term disability insurance provides, few of us can go several months without income. That’s where long-term disability insurance comes in handy. Though the average long-term disability claim will only last about three years, long-term disability can carry you through until you’re eligible for Social Security benefits.
For usually 1 to 3 percent of your income, you can lock in a portion of your salary for years after you are confirmed to have a disability.
The fact that most short-term and long-term policies actually have similar monthly premiums of 1 to 3 percent, despite their drastically different coverage lengths, can make short-term disability insurance comparatively very expensive.
Those considering short-term disability insurance may explore “self-insuring” through their emergency funds by building up enough for three to six months of expenses that can last them until long-term disability kicks in.
Most leading insurers offer some form of short- and long-term disability insurance. But be sure to check your employee benefits for disability insurance offerings. Many employers automatically enroll employees in complimentary short-term disability insurance, and even if you have to purchase short- or long-term disability insurance, you may get a cheaper group rate through your employer. Keep in mind, though, that these policies are generally not portable, meaning if you leave your job, you will have to enroll in a new insurance policy through your new employer or on your own.
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