For the vast majority of us, most injuries don’t stop us. We just tough it out and move on. But some injuries just can’t be ignored. And if not ignoring that injury means time lost from work, the whole financial balancing act you might be juggling could come tumbling down.
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This is a rather complicated topic so we’ll break it down into a couple of quick facts.
One, disability insurance is expensive, with premiums costing as much as 40% more for women that men.
Two, depending on what you do for a living, the cost of your disability coverage could be higher.
And the higher your replacement income – and this is generally what disability insurance is supposed to do – the higher the cost of your policy.
Why does disability insurance cost more for women?
Disability insurance generally cost more for women because they tend to use it more often and for different reasons than men do. It’s not because they tend to occupy more hazardous jobs although they certainly can and do. And their premiums for coverage will be higher because of that fact. Instead, it is because historically, they use disability policies to take time off from work for pregnancies or complications from those events. Let’s face it; there is no set outcome for a pregnancy. There is best-case scenario and we all hope for that sort of result: healthy baby, healthy mom, get-back-to-work-soon after the fact. But there is not guarantee everything will go according to plan.
And then there is mom’s income that might need to be considered in advance. Most couples consider the after-the-baby-is-born costs, not the cost of mom taking time off from work. And that time off can vary. For pregnancy, it is usually six to twelve weeks and many employers will allow you to tack on vacation and sick days to help cover missing income. But you can’t get a policy when you are already pregnant. That would be considered a pre-existing condition. So if you are planning a family, get it in advance of beginning.
Let’s cover a few basics before we get too far ahead of ourselves. Disability insurance doesn’t provide full replacement income in almost all of the cases. Usually, it falls somewhere between half and two-thirds or what you make. And this is taxable if your employer provides this policy for you. If the federal or state government provides coverage or you pay for it yourself, then the benefit you receive is not taxable.
But most of us need disability insurance for other reasons than pregnancy; such as if they are small business owners or they are sole providers. Here’s what you should look for in a policy.
There are basically three things you need to understand about disability insurance, which is like all insurance products, tailored to your greatest fears. You do have a fairly decent chance that disability of some sort will strike you over the course of a working career. It might not happen at work either. So you will need some sort of income protection. An emergency account works as just this sort of buffer. If your disability policy pays you for six months at half your paycheck, an emergency account based on three months of income will do almost the same thing.
Some disability policies have a waiting period before they begin paying out. The longer this period, the lower the cost of the policy. If you can survive for 90 days, you will be paying quite a lot less than people who need the money now.
And both one and two suggest that the better order your financial house is in, the less policy you will need.
As to small business owners, disability insurance covers more than just your personal income needs. It can keep the basic business running, paying bills and salaries and is designed to keep as many of the assets in place for a partner or in a worse case scenario, having to sell the business because you can’t come back. And should be strongly considered if you have a partner is the endeavor.
So what about those policies that pay cash now?
While they look good on the surface, they are full of exclusions and caveats that you will need a legal degree to navigate. Getting the cash you need right away and never missing a beat sounds like something we all could use. The problem with those policies is: the quicker you get the cash, the higher the cost of the policy.
Add to that the recurring condition clause suggesting that once you use it for a specific problem, you have to wait 12 months to use the policy again. Generally these policies are short-term – which if you have a short-term emergency account in place, you could focus on a long-term policy which is cheaper. Also keep in mind; you must keep your premium payments current as well. So you are essentially using your insurance money to pay your insurance policy. If you have some sort of waiver of premiums, the insurer will tell you when you don’t have to pay and your policy will cost more because of this.
The key to any insurance is dependent on the health of your personal finances. The better financial shape you are in, the less you will have to pay for additional coverage. And if you personal finance picture isn’t so good, the high cost of covering you will not make it improve anytime soon.
So if you haven’t begun to build that emergency account, if you haven’t begun to get healthy, now is as good a time as any to begin. It will save you money you haven’t spent yet.
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