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Long-term disability insurance offers the most comprehensive income-replacement coverage
- Disability insurance can help replace lost income if you can't work for a several months or years due to an injury or chronic illness.
- Most traditional employers offer short-term disability insurance at no cost to the employee, but that's probably not enough coverage.
- Long-term disability insurance can pick up where short-term coverage and your emergency fund leave off. The benefits from a private policy are usually bigger and are tax-free.
- Premiums for long-term disability insurance typically run between 1% and 3% of your annual pretax salary, but can vary depending on your coverage amount, age, location, health history, and occupation.
- Policygenius can help compare disability policies and prices to find the right coverage for you »
If you rely on a steady paycheck to support yourself or your family, you'd be wise to protect that income with disability insurance.
In exchange for a monthly premium, disability insurance helps replace your income if you're physically or mentally disabled and cannot go to work for a few months to several years.
Most traditional employers offer short-term disability insurance, but that usually only replaces up to 50% of your income for about three to six months, plus you'll have to pay taxes on the payments. Also, these policies are contingent on your employment with the company.
The Social Security Administration offers disability insurance too, but the process for qualifying as disabled and getting approved for benefits is notoriously lengthy and difficult to penetrate, plus the payments are paltry compared to what you could get with a private policy.
That's why experts at insurance-comparison site Policygenius recommend buying long-term disability insurance for the most "comprehensive and cost-effective" coverage. Long-term disability insurance can effectively pick up where short-term coverage or your emergency fund leave off, typically between 90 days and a year after the incident (this is known as the elimination or waiting period).
Despite popular belief, disability insurance is not just for on-the-job injuries. In fact, the most common disability insurance claims after work-induced musculoskeletal disorders (think: carpal tunnel, tendinitis, and back pain) are for cancer, pregnancy, and mental-health issues like depression and anxiety.
The premiums for long-term disability policies are similar to short-term policies - around 1% to 3% of your annual pretax salary - but the payouts are typically bigger and tax-free, plus the benefit period can last decades, and even up until retirement. You can also pay extra for specific policies, such as "own occupation," which stipulates that you will still receive full benefit payments even if you're able to work, albeit at a different job.
If you're self-employed and shopping for disability insurance, you'll have to provide tax returns from the past two years as proof of income, according to Policygenius. You may also consider paying a higher premium each month to shorten your elimination period, or the time you have to wait to receive insurance payments, since you don't have short-term coverage from an employer to tide you over.
With long-term disability insurance, you're responsible for choosing your coverage amount - the rule of thumb is around 60% of your gross salary; how long your payments will last, called the benefit period; and the waiting or elimination period, which is how long you have to wait until your insurance payments kick in. All of these factors will affect how much you pay each month to keep your policy active, according to Policygenius.
Your age, location, health history, and occupation will also have an impact on your premium cost. As such, the longer you wait to buy disability insurance, the more expensive it becomes.
It's important to note that some long-term disability insurance policies come with exclusions for preexisting health conditions, explains Policygenius. Insurers will review your medical records and if you had serious treatment for a past illness or ailment, it may be excluded from your coverage. In other words, if that specific condition prevents you from going to work and earning income in the future, your insurance will not step in.
Policygenius can help compare disability policies and prices to find the right coverage for you »
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