Disability insurance provides protection when illness or injury prevents you from working.
The cost of disability insurance varies depending on the policy and insurance company, but the cost of being without it could be exponentially greater. Disability insurance provides people with a layer of protection should sickness or injury prevent them from working and earning an income. It is a vital part of financial planning.
According to ProtectYourIncome.com, most people think they have a mere 16 percent chance of becoming disabled. However, there is a much greater chance of becoming injured or sick enough to miss work for weeks or even months. For those under the age of 35, there is a 1-in-3 chance they will be disabled for a period of at least 6 months during their working years. Women have a 54 percent chance of becoming seriously disabled during the course of their career. Men have a 43 percent chance. With those kinds of stats, it is important for people to educate themselves regarding disability insurance.
Disability insurance makes up a portion of a person's income while out of work on disability. More than 375,000 Americans become disabled annually. About 30 percent of people between the ages of 35 and 65 will become disabled and be out of work for 90 days. However, according to ProtectYourIncome.com, close to 100 million people do not have long-term disability insurance included in their coverage and are running the risk of being disabled without income for an extended period of time.
Disability insurance provides an employee with anywhere from 45 to 60 percent of their gross income while they are out of work. In some cases, disability insurance benefits are tax-free. However, in other cases, the benefits are taxable. When comparing disability insurance plans, taxation is an important factor in evaluating the cost. When benefits are paid by an employer to a disabled person through a group disability insurance plan, they are treated as normal income and are taxable. Thus, individuals who receive group disability insurance must pay income taxes on the benefits as if they earned the money as salary.
Disability insurance benefits that are paid through an individual disability insurance plan are not taxed. This includes a policy taken out by an individual and not paid through an employer. All the money received by a disabled individual can be used for living expenses. They don't have to set some aside to cover income taxes.
According to the Insurance Information Institute, states such as New York, Rhode Island, New Jersey and Hawaii mandate that employers provide disability benefits for up to 26 weeks. Short-term disability may be provided, but employees may be required to pay the premiums. Short-term disability policies have a waiting period of up to 14 days, and benefits are paid for a period of a few weeks to about two years. Long-term disability plans usually require a waiting period of several weeks to months. Benefits, however, could be paid for the rest of a person's life, depending on the terms of the plan.
States like California offer employees a disability insurance plan. For people who don't work for the state, another option is voluntary plans. These are paid by employers and employee groups. Finally, people can elect to have their own disability insurance. This plan would be paid solely by the individual, without a contribution from the employer.
The cost of disability insurance varies depending on the benefit period, elimination period, individual's age, benefit amount and occupational class. Disability insurance usually costs anywhere from 1 to 3 percent of an individual's annual income. For someone who makes $60,000, a good disability plan will cost between $600 and $1,800 a year. People can save money by opting for policies with a longer waiting period before benefits begin, which have lower premiums. Another way to save money is to choose a plan with a shorter benefit period.
One of the biggest mistakes individuals make when shopping for disability insurance is trying to compare rates. According to Disability Income, each disability policy is different from the next, so there is no way to compare them. In addition, people should not choose the cheapest disability insurance policy. According to About-Disability-Insurance.com, the chance of receiving a benefit each month under a cheap disability insurance policy is significantly lower than getting benefits from a contract from a reputable company. Experts say people should have a range of money they are willing to spend and then have insurance companies show the various plans they can afford. Not only should the monthly benefit be taken into account, but also the benefit period, optional riders and taxes.
Before choosing a policy, individuals need to have a comprehensive understanding of how the plan defines disability to ensure coverage. The lowest rates usually don't provide the same level of coverage as more expensive plans. People should read the fine print and examine how the insurance company will determine whether or not they are disabled. They should choose a plan that renders them disabled if they are unable to work in their chosen profession. Some disability insurance policies consider someone disabled if they can't work in any occupation. That is not the type of policy one should choose. Being smart about choosing a disability insurance plan will pay off in the long run, providing for individuals and families should a disability occur.