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How to set up a safety net for your paycheck
It’s easy to pretend accidents or ailments don’t happen, but the odds aren’t exactly in your favor. In fact, per the U.S. Social Security Administration, around one in four 20-year-olds will become disabled before they retire. That’s a scary stat, but there’s a way to at least set up a safety net. Long-term and short-term disability insurance protects your paycheck — and by extension, your family — if you can’t work due to illness or injury.
There are actually two types of disability insurance. Short-term disability insurance replaces a portion of your paycheck for a short period of time. Think three to six months. Most people get STDI through their employer. You can get an individual policy through some private insurers, but these plans generally cost more than they’re worth.
Long-term disability insurance (LTD), on the other hand, provides coverage if you’re out of work for a longer period of time. Think years or even decades. It, too, is sometimes offered by employers, but the benefit is less common. Plus, the coverage is often inadequate. That’s why people often take out supplemental LTD policies. You can also take out an individual long-term disability policy if the benefit isn’t provided by your employer. Policies generally fall into two buckets:
If you can afford an “own occupation” policy, that’s what you should get. We also recommend a non-cancelable and guaranteed renewable policy (sometimes only available as a rider). Non-cancelable means the insurer can’t change the terms of your policy (including the premium rate), as long as the premiums are paid. “Guaranteed renewable” means your policy can’t get canceled so long as your premiums are paid.
LTD and STDI policies work best in tandem. That’s because long-term disability insurance doesn’t kick in right away. There’s an elimination period you’ll wait out. It’s usually anywhere from 30 to 365 days … or hopefully right around the time your short-term disability insurance expires. LTD policies typically pay out for two, five or ten years or until retirement. The average individual disability claim lasts for a little under three years, according to the Council for Disability Awareness. Disability insurance can help you if you need long-term care.
Policygenius makes it easy to compare disability insurance companies to find one that works best for you. Here’s a look at how long-term disability insurance and short-term disability insurance typically work.
Let’s start with the application process, which takes about four to six weeks to complete.
Once you have the right long-term disability insurance policy in place, you’ll start paying your monthly premiums. In the event that you’re injured or too ill to work, here’s what you’ll need to do:
As we mentioned earlier, short-term disability insurance is most commonly obtained through an employer-sponsored group plan. Those plans are “guaranteed approval,” meaning you won’t have to take a medical exam or go through the stringent underwriting associated with an LTD policy. If you’re applying for STDI with a private insurer, however, you’ll likely take a medical exam.
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Policy terms vary by employer. Some cover your premiums completely, while others ask you to pay a small portion to participate. It’s also common for coverage to kick in only after you’ve worked for a set period of time or if you work at least 40 hours a week.
State law plays a role here, too, though. Some states, including California, Hawaii, New Jersey, New York or Rhode Island, actually require employers to provide short-term disability coverage. Still, here are a few general policy guidelines:
To receive payment, you’ll have to file a claim with the insurer, whether you’re working with them directly or through an employer. To learn exactly how your short-term disability policy works, be sure to review your coverage with a human resource representative or broker.
It depends. Long-term disability premiums are based on age, gender, occupation and features, but you can generally expect to pay between 1% to 3% of your annual salary for a policy. Remember, you’ll want the benefit amount to cover you if you’re out of work for an extended period. The good news here, though: When you buy an LTD policy (as opposed to signing up for one offered by an employer), the benefits aren’t taxed. That means a policy that pays out 60% of your gross income would effectively replace most of your take-home paycheck. You can learn more about how disability insurance rates are calculated here.
Note that if you have a pre-existing condition, it could cost more to get covered.
Short-term disability, on the other hand, can cost anywhere between $0 and way too much, depending on where you get it from. That’s why we generally only recommend short term disability insurance offered by your employer. Private policies almost always falls into the “way too much” category, so you’re better off just self-insuring for the short term — i.e. socking those “premiums” away in an emergency savings account — and purchasing a LTD policy instead.
While specifics vary from case to case, our Geniuses generally recommend the following features for a long-term disability policy.
Finally, remember, disability insurance doesn’t cover your loved ones if you die. You’ll need life insurance for that. You can find a primer on life insurance here.
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