When you’re thinking about getting disability insurance benefits, it can be helpful to learn more about your options and make comparisons when necessary. For example, you might wonder whether there are any benefits to purchasing private disability insurance.
While it does come at a cost, private disability insurance can provide several benefits: it can allow you to focus on recovery, meet your financial obligations, and avoid debt or bankruptcy in case you become disabled.
This article talks in more detail about the benefits of private disability insurance.
When You Should Consider Private Disability Insurance
Private disability insurance benefits play an important role in providing financial assistance to disabled people and can be excellent backup plans. The following are some scenarios to consider regarding private disability insurance benefits.
Limited Time Off
There is a chance that you may not have any paid time off, but even if you do, it is unlikely that it will be sufficient to cover a disability period. The U.S. Bureau of Labor Statistics data shows that 33% of private sector employees receive 15 to 19 days of paid vacation after several years of service. Though it might sound like an excellent idea for a summer getaway, it probably won’t cover anything significant, like a disability.
Unpaid Leave
Despite popular belief, the Family Medical Leave Act (FMLA) does not guarantee any paid time off from work. People who are qualified under the FMLA can take up to 12 weeks of job-protected leave for medical reasons.
Typically, the employer does not pay the employee during this time period. In fact, many companies expect employees to make use of their employer-funded disability insurance to compensate for the income they have lost.
Limited Savings
Some people believe they are prepared for the worst-case scenario because they have adequate savings. Disabilities, though, can last for quite a while. It’s also possible that your medical bills will be very high. You will need to find another way to earn income once your savings run out. Additional life expenses to be added here?
Limited Coverage Through Workers’ Comp
If you are unable to work due to a work-related accident or illness, you may be able to file a workers’ compensation claim to compensate for your medical expenses and lost income.
However, if your disability does not relate to an accident or illness occurring at work, this program will not provide coverage. It’s important to have a backup plan if you become sick or injured due to non-work-related causes.
Ineligibility for Social Security
In order to receive disability benefits from Social Security, people must meet the strict eligibility criteria for disability set by the Social Security Administration (SSA). Only about 31% of all applications for Social Security disability benefits were approved between 2010 and 2019—many of those were only approved after a lengthy appeals process.
You should have a backup plan for paying your bills in case you are unable to collect disability benefits from Social Security.
Types of Private Disability Insurance
There are two basic types of private disability insurance: short-term and long-term.
Short-term Disability Insurance
If you become temporarily disabled, meaning you are unable to work for a short period of time due to illness, injury, or pregnancy, short-term disability insurance will cover a percentage of your income. Short-term Disability Insurance (“STD”) plans will pay you ½ to 2/3 (unsure if fractions should be spelled out) of your salary for 13 to 26 weeks.
Long-term Disability Insurance
If you have Long-Term Disability Insurance (LTD) coverage, you can continue receiving benefits even after the expiration of your short-term disability benefits (again, nearly 2/3 of your salary) if your disability continues.
Although policies differ in the duration of coverage, long-term disability benefit eligibility typically ends at age 65 or 67. There are policy-specific provisions that allow for specific conditions to recover benefits for limited periods of time, such as mental health and substance abuse.
Benefits of Private Disability Insurance
You might want flood insurance if you know you could lose your home to a flood. You would want quality health insurance if you had a 25% chance of requiring costly surgery.
The Social Security Administration says that one in four workers will become disabled before they reach retirement age. Despite the high chance of being disabled, many workers do not protect their income with disability insurance.
In the event of a disability, many workers are unable to earn an income. Even if you do have other means of income available, you may not realize them until it is too late.
In such cases, private disability insurance is a great option to focus on recovery without worrying about finances. The following are the benefits of private disability insurance:
Income Protection
While many people carefully insure their homes, vehicles, valuable items, and even their pets, there is a surprising divide when it comes to safeguarding the most crucial asset—income. A consistent source of income is the most valuable asset anyone can have, regardless of their income level.
Private disability insurance can play a key role in safeguarding your income. In the event of disability, these policies can provide a more extensive safety net, potentially offering a larger income replacement
Ensuring the protection of your ability to earn a living should be a priority. After all, it is essential to maintain the lifestyle and possessions you’ve worked hard to secure.
Focusing on Recovery
Concerns about financial situations can easily stand in the way of recovery. A disability that prevents you from returning to work can cause additional stress about how you will financially stay afloat, which may contribute to the worsening of your condition.
If you are unable to work due to a disability that qualifies under the policy’s definition, disability insurance can help you replace your lost income. This could mean you can take your time recovering and not feel pressured to return to work against your doctor’s orders. Meeting Financial Obligations
Regardless of your existing income, if you become disabled and find yourself unable to work, you may still go into debt. This is especially the case if you are the owner of a property that was used to secure a loan, such as your home or your vehicle.
Even with savings and other financial assets, if you become disabled and find yourself unable to work, financial obligations still remain. For example, mortgage payments do not cease to be due even if you are not receiving work-related income. Additionally, bills and credit card payments do not cease, even if your income does. Fortunately, there are a number of states that provide protections against creditors being able to seize your private disability insurance benefits. In addition, federal legislation known as the Consumer Credit Protection Act safeguards a portion of your disability payments from being seized.
If you still owe payments on your mortgage, you must continue making payments or risk losing your home to foreclosure. If you fail to make payments, your property may be taken away from you.
When it comes to unsecured debt, such as credit card debt, you are still responsible for making repayments. Fortunately, there are a number of states that provide protections against creditors being able to seize your private disability insurance benefits. In addition, federal legislation known as the Consumer Credit Protection Act safeguards a portion of your disability payments from being seized.
Avoiding Bankruptcy, Debt, and Financial Emergencies
The Council for Disability Awareness estimated that approximately 15% of people who file for bankruptcy do so because they or a member of their family has suffered an illness or injury. They also found that the remaining 20% are losing their jobs, and 26% are in debt because they haven’t paid their medical bills.
People with disabilities often depend on credit as a means of income because they do not have access to other resources, like emergency funds.
People who are having trouble paying their regular bills may turn to credit cards or even short-term loans with high-interest rates. The Federal Home Loan Bank estimates that about 1 in 18 mortgages are not being paid because the individual is disabled.
Reduce Financial Burden
We understand why you may deem it unnecessary to consider disability insurance if you are an individual in good health. However, the Social Security Administration reports that over 25% of today’s 20-year-olds will experience a year-long absence from work due to a disability at some point throughout their working lives.
Additionally, it is estimated that one out of every seven people, aged 35–65, will become disabled for a period of five years or more. People become disabled for various reasons, not only because of major accidents.
Accidents account for just 10% of disabilities that result in lost workdays, while the other 90% are attributable to diseases like cancer, heart disease, or, more recently, COVID-19.
When one partner has a good job and is confident in their ability to support themselves financially, it’s easy to overlook the necessity of disability insurance.
One partner may have job safety and confidence in their financial income to provide support for their household, but it is likely a shared lifestyle that utilizes the incomes of both partners. Finances and a regular lifestyle may become challenging to maintain if one income suddenly stops.
Purchasing a private disability insurance policy can help lessen the financial blow of becoming disabled.
Private Disability Insurance vs. SSDI Benefits vs. Workers’ Compensation
If a person develops a disability that prevents them from working, they may be eligible for Social Security Disability Insurance (SSDI), which is determined by the amount of Social Security taxes that person has paid on their income.
Private disability insurance does not stop you from getting SSDI benefits. However, some private disability insurance policies require that you apply for SSDI benefits and complete the entire appeals process. If you are approved for SSDI benefits, the benefit amount may be subtracted from your private disability insurance benefits.
You can receive workers’ compensation if you become injured or sick due to work-related causes. Certain private disability insurance policies may refuse or decrease benefits in the presence of workers’ compensation.
How Disability Insurance Policies Work
A disability insurance policy is an official agreement between you and an insurance provider to provide a set amount each month in the event you become disabled. Regardless of whether it is a long-term or short-term policy, there are generally five essential characteristics that policyholders must be aware of:
Premiums
It is the amount that an individual or employer pays for the insurance. The premiums are different for everyone because they are based on current health status, any pre-existing health conditions, the length and type of coverage, the benefit amount, and other factors.
Benefits
This is the amount that you will receive every month in the event that you are unable to work. A reasonable amount would be 60% to 80% of your total monthly earnings.
The benefit will be taxable if your employer pays for a portion of your group plan. However, the benefit of an individual policy is typically not taxed (unless it was paid for with dollars that were already taxed).
Benefit Period
The benefit period is the duration of time during which you are eligible to receive benefits. It won’t be more than a year for STD insurance, but for LTD insurance, it could be anywhere from two years to retirement or until you get well.
Waiting Time
This is the time it takes to go from being disabled to being paid disability payments. It is also known as the elimination period. The waiting period for Short-term Disability Insurance is typically shorter, while for Long-term Disability Insurance it’s typically longer.
Disability Definitions
To be eligible for benefits, one must meet the criteria set forth by a disability policy. If your disability prevents you from working in your “own occupation” (or any specialty within it), you are eligible under the “own occupation” definition.
If your disability prevents you from working in “any occupation” you are in or can become reasonably suited to through further education, training, or experience, you may be eligible under an “any occupation” definition.
There are also different levels of disability that can be defined, such as “partial disability,” which can qualify you for different percentages of the total amount of benefits that you receive.
Conclusion
A private disability insurance policy can provide several benefits to policyholders.
But it is important to make sure to read the fine print of policies to remain informed about the extent of coverage, eligibility for benefits, and which disabling conditions may or may not be covered.
