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Protecting your income: Why you need disability insurance (Q&A)

When it comes to types of insurance Americans choose to purchase, disability insurance often is at the bottom of the list -- if it's on the list at all. Others have disability insurance through their employer, but do they have enough coverage to replace their income if they're unable to work?

Not having disability insurance may be a serious oversight: According to the U.S. Social Security Administration, just over 1 in 4 of today's 20-year-olds will become disabled before they retire.

why you need disability insurance And disability isn't just a risk for people with a chronic disease or who work in jobs with a high risk of injury. According to the Council for Disability Awareness, a nonprofit organization whose mission is to educate Americans about the benefits of disability insurance, a healthy 35-year-old woman who works in an office has a 24 percent chance of becoming disabled for three months or longer.

We talked to Barry Lundquist, president of the Council for Disability Awareness, to learn why disability insurance is so necessary and why so few Americans have this coverage.

Why you need disability insurance

What's the difference between short-term and long-term disability policies?

Both types of policies replace a portion of a wage earner's income if a disabling illness or injury stops them from working. Depending on the provisions of the specific policy, short-term disability payments typically begin fairly quickly, often on the first day of missed work due to an accident or on the eighth day following the start of an illness. As the name implies, short-term disability pays benefits for a shorter period of time, typically up to a maximum of 26 weeks.

Long-term disability protects against longer and more severe disabilities. In the event of an illness or injury, long-term disability payments usually don't begin until after either 90 or 180 days, depending on the specific policy, but they usually continue for a longer period of time. Typically, long-term disability plans will pay out until the disabled individual reaches age 65, although less-costly options are available that pay for up to five or 10 years.

What exactly does a good disability insurance policy cover?

The fundamental purpose of disability insurance is to replace part of a person's income if he or she can't work due to a disabling illness or injury. Important considerations include:

  • When benefits would start.
  • How long they would continue.
  • What percentage of income would be replaced.
  • How the policy defines "disability."

A longer benefit period costs more, but in most cases, it's best if the plan pays until age 65 to continue protection for the long haul.

In considering how much protection to buy, the wage earner should determine the amount of monthly payment (or the percentage of take-home pay) needed to cover their bills. Most employer-provided long-term disability plans will replace 60 percent of a person's income. If this is the case, you may want to consider purchasing additional individual disability coverage to supplement the employer plan in order to meet your financial needs. If a person receives commissions, bonuses or overtime as part of their compensation, they should explore how those forms of pay are covered by the policy.

Who should have disability insurance?

Anyone who depends on his or her paycheck to survive financially needs to protect that paycheck. For virtually every working American, the ability to earn an income is their most valuable and important financial resource. Studies have shown that too few individuals or families have much in the way of savings, and they can't pay their bills for very long if their paycheck suddenly stops.

Even if someone diligently saved 5 percent of their pay for 20 years, that savings could easily be depleted in just a single year of disability. And when people save, they are doing so for a purpose: for retirement, for a down payment on a home or for a child's education.

When people think of disability, they may think of someone in a wheelchair, or someone with an acute mental disability. But what is the real picture of disability in the United States?

This question illustrates an important misperception. From our Council for Disability Awareness research, we know that most people think disabilities are caused by catastrophic accidents. In reality, 90 percent of disabilities are caused by illnesses. The most common cause of disability claims are musculoskeletal disorders (back, muscle and joint disorders), followed by cancer, accidents, mental disorders and cardiovascular disease. 

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