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How Does Disability Insurance Work and Do I Need It?

You’re young and in good health — why would you need disability insurance? If you’ve never thought about disability insurance, you’re not alone. But ask yourself this: How long could you go without a paycheck? Weeks? Months? What about years? This scenario isn’t out of the question in the event of a serious illness or injury. Knowing what disability insurance covers will help you understand how it can benefit you, no matter your condition. So, before you dismiss disability insurance, let’s take a look at the benefits and how disability insurance works to protect your income in the event the unexpected happens.

Do I Need Disability Insurance?

According to statistics from the Council for Disability Awareness, just over 1 in 4 of today’s 20-year-olds will become disabled before they retire. Contrary to popular belief, you can become disabled by more than an accident. Cancer, heart disease and other health conditions can prevent you from being able to work, too. Plus, certain types of people may need disability insurance more than others.

What Does Disability Insurance Cover?

Individually owned disability insurance is intended to replace anywhere from 60-70% of your gross income on a tax-free basis if an accident or illness prevents you from working. That means disability insurance can be used to pay your standard expenses, like bills, groceries and your rent or mortgage.

Long-term vs. Short-term Disability Insurance

There are two types of disability insurance: short-term and long-term disability insurance. Short-term disability insurance has a maximum benefit period of no more than two years, whereas long-term disability insurance has a maximum benefit period ranging from 365 days to age 67.

Many employers offer some type of disability insurance, and usually it’s short-term disability insurance. If that’s the case, you might require supplemental coverage if you’re ill or unable to work due to injury for a long period of time. That’s where long-term disability insurance comes in.

How Much Does Disability Insurance Cost?

When determining the price of a long-term disability insurance policy, there are factors to keep in mind, including time. The younger you are, the cheaper long-term disability insurance tends to be.

The length of the elimination period of your policy also can affect the cost of the policy. The elimination period is the waiting time between the onset of your disability and when you can start receiving benefits. The longer the waiting period, the cheaper your premium will be. If your employer offers paid sick time or a short-term disability policy, keep this in mind when choosing an elimination period. A typical waiting period is 90 days. Consider the pros and cons, especially if you’re seeking disability insurance as an individual.

Selecting a non-cancellable policy means the policy can’t be cancelled by your insurance company (unless you don’t pay the premiums). This way, you can choose to renew the policy without a premium increase or a reduction in benefits.

If you think your income could increase in coming years, you may also want to consider a future purchase option. Also known as a guaranteed insurability option, a future purchase option allows you to increase the amount of coverage as your income increases.

What About Social Security?

Social Security disability insurance (SSDI) is a federal program that can provide monthly benefits if you become disabled before retirement age and are unable to work. While this provides an added layer of security, it may not be wise to rely on SSDI in the event you’re unable to work.

SSDI coverage has its limits, and SSDI payments tend to be relatively small. The Social Security Administration lists the average monthly benefit for a disabled worker at $1,258 in February 2020. In addition, Social Security has strict rules about what counts as a disability.

Insurance That Works When You Can’t

If you’re injured and unable to work, will you be able to keep paying your bills? Disability insurance income can protect you and your loved ones from the inevitable bills that could add up in the absence of a paycheck. Ask your Farm Bureau agent how disability insurance can keep working — even if you can’t.