The Insurance Buying Guide: What Happens If You Become Disabled?
Disability income insurance is a form of health insurance that provides a weekly or monthly income benefit to replace a portion of the salary or wages lost when you're unable to work because of an injury or illness.
If you don't have disability income insurance, you have to rely on other resources to help offset the effects of a disability. What sorts of other resources?
- Cash Savings
- Investments
- Business Assets
- Government Programs
- Borrowing
How long will your savings last? And how liquid are your investments or business assets? If you have an art collection or a car collection, it might take months or years to find the right buyer at the right price -- and the same goes for a business. What are you going to live on in the meantime?
And who is going to loan you enough money to cover your costs during an extended disability? Certainly not a bank, since you have no way of repaying the loan if you aren't earning a living. (On the other hand, if you can rely on a rich relative who loves you dearly, you may not need disability income insurance.)
What about programs through work? If you're an employee, there may be some work-related benefits available from a group disability plan, a salary continuation plan, employee stock plan, workers' compensation, etc.
But group disability benefits are of short duration -- a year or less -- and cover only a percentage of lost income. These fixed and capped benefit plans also tend to discriminate against higher-paid employees.
For example, a group plan might provide benefits equal to 60 percent of your pay, up to a maximum benefit of $2,000 per month ($24,000 annually). This may prove to be an adequate benefit if you earn $40,000 or less per year. But for people earning more, the disability benefit is still limited to $24,000 per year. If you earn $60,000 annually, then your disability benefit would cover only 40 percent of your ordinary pay.
An important point about group benefits or work-related plans is that you merely "rent" this coverage. Benefits are available on the condition that you continue to be an employee. If you terminate employment, your disability benefits also are terminated. If a disability strikes between jobs, no work-related benefits are provided.
