Individual Disability Insurance
When a disability strikes, lost wages can lead to a financial crisis. Individual disability insurance replaces a percentage of the policyholder’s lost income, as per the policy terms, if a disability prevents the policyholder from working. This is an important coverage that insurance sales professionals should be offering to any client who depends on paycheck.
The Need for Disability Income Insurance
According to the Social Security Administration, approximately one in eight of today’s 20-year-olds will die before turning 67, whereas more than one in four will become disabled. For working-aged individuals, the odds of disability are much greater than the odds of death – meaning buying life insurance but not disability insurance doesn’t make much sense.
Millions of Americans experience disability at some point in their lives – and disability can strike at any age. Some disabilities are due to injuries and others due to cancer, stroke, heart disease, and other health conditions.
When a disability strikes, a person may no longer be able to work. Even for people with savings and health insurance, lost income can lead to financial disaster, especially if the period of disability is prolonged.
Long-Term vs. Short-Term Disability Insurance
Some workers have access to short-term disability insurance, long-term disability insurance, or both through their work.
- Short-term disability insurance is the most common offering – although most workers receive nothing at all. The S. Bureau of Labor Statistics says 40% of civilian workers have access to short-term disability insurance. It can replace a percentage of the policyholder’s income for short periods of disability. Some policies provide benefits for up to a year, but the maximum benefit period is typically only three to six months. After that, the insurance policy won’t pay benefits, even if you’re still unable to work. The short benefit period means short-term disability insurance is not a suitable replacement for long-term coverage.
- Long-term disability insurance is even less common – the U.S Bureau of Labor Statistics says only 35% of civilian workers have access to such coverage. It has a longer benefit period than short-term coverage and a maximum benefit period of two years, five years or longer. The terms and benefit amount may be too limited to meet policyholders’ needs.
Although these products can provide important coverage for many workers, they are not the same as individual disability insurance.
Who Needs Individual Disability Income Insurance?
Individual disability income insurance is suitable for anyone who earns more than $50,000 annually and depends on a paycheck.
It doesn’t matter how old the worker is – as disability can strike at any age, even workers in their 20s can benefit from having coverage and locking in good rates.
The worker’s industry doesn’t matter, either. Doctors often purchase individual disability insurance, but lawyers, computer programmers, accountants, business owners, and people in many other fields can also benefit from coverage.
Ask yourself or your clients the following:
- If you couldn’t work because of a disability, how long could you make ends meet without a paycheck? A month? Six months? A year?
- After your savings ran out, how would you pay for your mortgage or rent, utility bills, groceries, and other necessities? Keep in mind that workers’ compensation only applies if your disability is work related, and many are not. Social Security Disability Insurance is also hard to qualify for – and even if you’re totally disabled and do qualify, the benefits are modest.
- What would you have to give up if you couldn’t afford your lifestyle? How would this financial hardship affect you and your family? If this hardship is something you would rather avoid, individual disability insurance can help.
How Much Does Individual Disability Insurance Cost?
Individual disability insurance typically costs around 1% to 3% of the worker’s annual income. Based on these figures, a person who earns $100,000 a year might pay $1,000 to $3,000 for coverage.
It’s important to remember that disability insurance replaces your most valuable asset: your paycheck. When you think about how much your paycheck is worth, paying for protection just makes sense, especially given the high odds of disability.
If cost is a concern, you can customize your individual disability insurance policy.
- Adjust the elimination period. The elimination period (also called the waiting period) is the amount of time you have to wait after you experience a disability before you can start receiving benefits. If you select a longer elimination period, you may be able to reduce costs.
- Adjust the benefit period. The benefit period is the maximum amount of time you can receive benefits while disabled. A long benefit period provides the most protection – you may like to look for a benefit period that lasts until retirement age. Nonetheless, some coverage is always better than none. You can choose a shorter benefit period if this better fits your budget.
- Adjust the coverage amount. The coverage amount is how much of your income the policy will replace if you file a valid claim. Replacing a higher percentage of your income will make your financial situation easier if you ever experience a disability.
- Select the definition of disability that works for you. Policies with an own-occupation definition of disability provide robust coverage – doctors and other highly specialized professionals may benefit from this type of coverage. However, for many workers, a policy with an any-occupation definition of disability may provide adequate coverage and be more affordable.
- Select only the riders you need. Insurance riders are provisions that modify your coverage and add extra benefits. Some riders may be available for no extra cost (depending on the disability insurance company), but others can increase the total disability insurance premium cost. If you’re trying to save money, pick only the riders that are essential for your needs.
