Disability Insurance Cost

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According to the Council for Disability Awareness, one in four 20-year-olds will become disabled before retirement. This type of disability may be related to a temporary illness or injury. However, they will be qualified as disabled and unable to work for a time. That is 25 percent of new employees just graduating college and starting their working career. If that does not open your eyes, imagine this scenario. A healthy female, age 35, has a 24 percent chance of becoming disabled for three months or more during her working career, and 38 percent of those women will be disabled for five years or longer. In the same vein, a healthy, 35-year-old man, has a 21 percent chance of becoming disabled for at least three months and the same 38 percent chance that the disability will be for five years or longer. Most Social Security Disability payments for temporary disability only provide two-thirds of a person’s salary for up to eight weeks, depending on the state in which the person resides.

What is Disability Insurance?

Disability Insurance is a policy that pays the insured benefits to replace income when the insured is out of work due to an illness or injury. There are two types of Disability Insurance policies: long term and short term. Long-term plans cover the employee for a longer time, typically over two and a half years, whereas short-term plans are considered temporary policies, wherein the insured is only out of work for a relatively short time.

Who Needs Disability Insurance?

The real question should be: who does not need Disability Insurance? Both small business owners and employees need it. Many of these people live either paycheck to paycheck or have a small savings account that will be depleted quickly in the event the individual is disabled. Furthermore, since Social Security Disability does not provide 100 percent of what an employee would make when working, Disability Insurance is typically needed to provide gap coverage and for after the limited time the government provides. Disability Insurance provides a safety net that any working person or small business owner needs to feel secure and not worry about day-to-day expenses while recovering.

The good news is there is no limit to the number of employees a company can offer Disability Insurance. Disability Insurance only covers non-work related accidents and illnesses. Therefore, if you are riding your bike with your kids and break your leg, you would be covered for the time you are unable to work. However, if you fall off the ladder while fixing a power line while on the job, your Disability Insurance would not cover your time off of work. This would be Worker's Compensation. As a result, your premiums are not based on the risks you encounter on the job unless it is a high-risk job, making this type of coverage more affordable to employees and employers alike.

What Does Disability Insurance Cover?

Disability Insurance is available for either short- or long-term policies, allowing businesses and individuals to customize it for their specific needs.

This policy is often used to cover maternity leave. Many states do not have a standard or coverage for women having a child. If they do have any coverage, it may only cover four to six weeks of leave. Short-term Disability allows a woman extra time to bond with her baby, continue to heal, and adjust to the new addition to the family.

For those in need of rehabilitation services, which aid in returning to work at a faster rate or even Employee Assistance Programs (EAP), long-term Disability coverage can offer these services and more. Rehabilitation services allow an employee to learn how to either regain the use of a damaged part of the body or compensate for a newly unusable body part by utilizing other parts of the body. Therefore, this policy will pay for this service to mitigate the loss of potentially extended payments overall. In addition, those requiring addiction or grief counseling or other EAPs will find long-term Disability plans useful in paying for these services, allowing the employee to return to work much faster:

  • Short-Term Disability Insurance: Covers a person who has become disabled due to an illness or injury for 60 to 180 days and sometimes up to one full year. While it is usually utilized for things like injuries and maternity leave, it can also cover illness-related issues, such as the time someone is away due to chemotherapy treatments. Short-term Disability policies typically cover 80 percent of your gross income during this period, allowing you to cover most of your monthly expenditures.
  • Long-Term Disability Insurance: Is used to cover up to 60 percent of the gross income of a person who is considered disabled and unable to perform their job due to an injury or illness. The typical use is related to injury, but it could be used to recover from things like a stroke, heart attack, or major surgery. Usually, the person is considered disabled for 180 days or more, and the person can receive this insurance payout up to the time in which they would be eligible for retirement or age 65. To elaborate on the amount this pays, a salaried employee can easily determine the amount he or she grosses, as it is consistent from week to week. However, a business owner or a commissioned employee has a varied income. In these instances, the annual gross income is determined based on earning statements, bank records, and tax returns for a specified time, typically six months to three years.

How Much Does Disability Insurance Cost?

Disability Insurance is calculated based on your age, annual income, and type of employment. Like other types of insurances, the cost of the insurance is based on a risk to reward ratio. The average cost of Disability Insurance, whether short term or long term, is 1 to 3 percent of your annual gross income. To put this into perspective, a person making around $100,000 a year in gross income will pay approximately $1,000 to $3,000 a year for Disability Insurance. This assumes the person is under the age of 45 and works in a job with minimal risks. On the high end, premiums for Disability Insurance can cost as much as 15 percent of your annual gross income, especially if you are over the age of 45 and in a high-risk job, such as a construction worker on high rises or an airline pilot. On the low end, you will pay less than 1 percent of your annual gross income if you are under the age of 30 and work in a career that is mostly stationary, such as a secretary or office manager.

When is Best to Apply for Disability Insurance?

As with any type of insurance, the best time to apply for Disability Insurance is when you do not need the coverage. When you are healthy, you can easily pass any medical screening and underwriting, helping to keep your rates low. In addition, it is best to apply for the insurance prior to age 65 or even prior to age 50. At age 65, the policy will become inactive as you will be considered eligible for retirement if you become injured or ill and require coverage due to the inability to work.

Worker's Compensation vs Disability Insurance

It is essential to know the difference between Worker's Compensation Insurance and Disability Insurance to understand why both coverages are necessary for your overall financial well-being. Worker's Compensation Insurance only pays if and when you are injured on the job or have an employment-related illness. It is often mandated by the state and by many contractors. Disability Insurance, on the other hand, covers illness and injury that happens away from the job and that is not job-related. It is not mandatory to have this insurance. However, it makes sure you can pay your bills if you are considered disabled for any non-work-related reason.