Early in your career, you are so busy developing skills and scoring promotions that it’s hard to imagine ever being forced out of work. You may feel like you have achieved rockstar status when you can cover monthly bills, student loans, and your friends’ drinks at brunch. But the fountain of cash could dry up abruptly—and the effects may be devastating.
Consider this: Just over 25 percent of today’s 20-year-olds will be disabled by age 67. Still feeling financially invincible? Didn’t think so.
Disability insurance may be offered by your employer, but you may find the policy is not sufficient for your needs. The ability to make money is your most valuable asset. Here’s how to make sure it’s properly covered.
Know the difference: short-term vs. long-term disability insurance
Pop quiz: How many months of expenses could your emergency fund cover? Probably not many. Almost half of Americans can’t easily float an unexpected $400 expense. A disability could quickly wipe out your savings—which is why you should gauge your protection now.
Short-term disability insurance can last for up to two years.
Maternity leave (most common!)
Long-term disability insurance covers you until you retire (usually 65) or die.
Back pain, joint, or muscle problems
Cancer, stroke, or heart disease
Decide how much coverage you need
Remember our pop quiz? Unless you overlooked a massive pile of cash, you probably need disability income insurance. Start with these questions to figure out how much:
How much do you earn every month?
What are your monthly expenses?
What employee benefits does your company provide?
Is there someone else who could cover your bills?
Do you have an emergency fund? If so, how much?
Life Happens—a nonprofit dedicated to smarter insurance decisions—has a calculator to get you on the right track.
What to look for in your company policy
Dust off your magnifying glass. This is where you will dig deep into your company’s policy.
1. How does your policy define disability?
This is by far the most important thing to watch for. Look for these key definitions:
Own occupation (own occ) is the best—but most expensive—coverage. You will receive a percentage of your income if you can’t perform your regular occupation and you aren’t working at a different occupation. Let’s say a lawyer loses her voice and can no longer represent clients. She will still receive benefits even though she could probably work another type of job.
Any occupation (any occ) covers you only if you can’t work in any gainful occupation for which you are reasonably suited by education, work experience or training. A trial lawyer who is unable to use her voice won’t qualify for benefits from an any occ policy because she could still land a non-speaking role.
Modified any occupation provides benefits if you are unable to perform your regular occupation and you decide to work in a different occupation.
Split definitions start with one definition and transition into another. It’s common to see own occ for two years and a shift to any occupation after two years.
What about Social Security? It’s possible that you will not qualify even if you are unable to work. There’s a five month waiting period and your disability must be expected to last for at least another 12 months or result in death.
2. When will you start receiving payouts?
If your income were suddenly cut, you need to know how quickly payments would begin. The waiting period from claim to benefits (which may also be called the elimination period) usually lasts 90 days. Keep in mind payments are usually only sent once a month, so you may not see a check on day 90. You should save an additional 30 days of cash to be safe.
3. How long will you receive payments?
This is called your benefit period. Most policies will cover you until age 65, but shorter periods can be purchased for lower premiums.
4. How much will you receive?
Payouts are typically 50 to 60 percent of your monthly income, before taxes. If your policy is paid for by your employer, payments will be taxable, which means you won’t receive the full amount.
5. Other things to ask about
When picking a plan, you should also find out:
Whether you have the option of paying a higher premium to boost your coverage later.
Whether you can add a provision to guarantee you can renew your policy at a locked-in rate for a certain period of time, or that you won’t be dropped from your policy.
Whether you will be eligible to receive a partial benefit—which could cover the difference between your pre- and post-disability income if you return to work on a part-time basis while recovering.
If there is anything that explicitly isn’t covered, like pre-existing conditions.
What to do when your company’s policy isn’t enough
If your coverage is insufficient, you may increase your protection by buying an individual disability income insurance policy. This may boost the income you will receive, help address shortcomings in your employer’s plan—like definitions of disability—and secure ongoing coverage in case you change jobs or become self-employed.
Here are some tips to get started:
Find out if your company allows you to buy more coverage through their existing group plan.
If you belong to any professional organizations, see if they offer discounted group plans.
Ask for referrals for an independent insurance agent or fee-only financial planner with experience insuring people in your industry.
Life is expensive and purchasing yet another insurance policy may seem unnecessary. But life is unpredictable, and helping to protect your income may be one of the smartest financial decisions you can make.