What is the best type of disability policy to buy?
Disability insurance plays a vital role in protecting your income in case you become unable to work due to illness, injury, or accident. Choosing the right disability insurance policy can be confusing with all the different options available. This article will discuss the key types of disability coverage and provide tips on selecting the best disability insurance for your needs and budget.
Types of Disability Insurance
There are two main categories of disability insurance: short-term disability (STD) insurance and long-term disability (LTD) insurance. Additionally, disability coverage may be obtained via Social Security, workers’ compensation, and veterans’ benefits for those who qualify.
Short-Term Disability Insurance
STD insurance replaces a portion of your income, usually around 60%, for a short duration if injury or illness prevents you from working. STD policies typically have a waiting period before benefits activate, often 7-14 days after disability begins. They may pay benefits for anywhere from 3 to 12 months. STD is sometimes offered as a voluntary workplace benefit. If not, you can purchase an individual policy.
Pros:
- Lower premium cost
- Covers disabilities lasting less than a year
Cons:
- Typically has a waiting period before benefits begin
- Replaces only a portion of income
- Duration of payments is limited
Long-Term Disability Insurance
LTD insurance provides income replacement if you remain unable to work after short-term policies end, up until retirement age. Like STD, LTD policies usually replace around 60% of income but some offer more generous benefits. High earning professionals may want to supplement group LTD with individual coverage. Some employers provide basic LTD plans but individual policies offer customizable benefits.
Pros:
- Covers extended disabilities
- Provides benefits until retirement
- Tax-free income if you pay premiums yourself
Cons:
- More expensive premiums
- Typically has a 3-6 month waiting period
Tips for Selecting a Disability Policy When choosing disability insurance, keep the following tips in mind:
Know how much disability coverage you already have. Many employers provide basic STD and LTD plans. Review what’s included and determine if supplemental individual policies would be beneficial.
Calculate your needs. In case of disability, how much monthly income would you require to maintain your lifestyle? Factor in expenses and other obligations. This will inform the benefit amount and duration to shop for.
Understand policy definitions. Look for “own occupation” coverage for the first 2 years then “any occupation”. This provides better protection to continue receiving benefits if your injury prevents you from performing your specific job.
Consider adding a cost of living adjustment (COLA) rider. This optional rider will increase your disability benefit amount annually to help keep pace with inflation. This is useful for maintaining long-term purchasing power in case of an extended disability.
Shop when young and healthy. Premiums are based on age and health conditions. By applying when young and healthy, you’ll likely pay lower premiums for the duration of the policy. Pre-existing conditions may not be covered depending on the policy’s limitations.
Conclusion
Disability insurance allows you to protect your most valuable asset - your ability to earn an income. While no one likes to think they’ll ever become disabled, it pays to plan for the unexpected. Understanding the key types of disability coverage is the first step to identifying insurance gaps and choosing a policy tailored for your financial situation. With smart planning, you can gain peace of mind knowing you’ll have replacement income should you ever become unable to work.
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