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Why you need disability insurance
The chance of missing months or years of work because of an injury or illness may seem remote, especially if you’re young and healthy and you work at a desk.
But more than one in four 20-year-olds will experience a disability for 90 days or more before they reach 67, according to the Social Security Administration.
One reason people shrug off the risk is they think about worst-case scenarios, such as spinal cord injuries leading to quadriplegia or horrific accidents that result in amputation, Harnett says. But back injuries, cancer, heart attacks, diabetes and other illnesses lead to most disability claims..
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Types of disability insurance
There are two main types of disability insurance — short-term and long-term coverage. Both replace a portion of your monthly base salary up to a cap, such as $10,000, during disability. Some long-term policies pay for additional services, such as training to return to the workforce.
Which Health Insurance Is Right For You?
|Short-term disability insurance||Long-term disability insurance|
|Typically replaces 60% to 70% of base salary||Typically replaces 40% to 60% of base salary|
|Pays out for a few months to one year, depending on the policy||Benefits end when the disability ends. If the disability continues, benefits end after a certain number of years or at retirement age.|
|May have a short waiting period,such as two weeks, after you become disabled and before benefits are paid||A common waiting period is 90 days after disability before benefits are paid|
Disability policies vary in how they define “disabled.” Some policies pay out only if you can’t work any job for which you’re qualified. Others pay out if you can’t perform a job in your occupation. Some policies cover partial disability, which means they pay a portion of the benefit if you can work part time. Others pay only if you can’t work at all.
How to get disability insurance
Here are ways to get coverage:
- Sign up for employer-sponsored coverage at work. Most employers that offer disability insurance pay some or all of the cost of premiums. Five states provide or require employers to provide short-term disability benefits, according to the Society for Human Resource Management: California, Hawaii, New Jersey, New York and Rhode Island.
- Buy disability insurance through the workplace. Some employers don’t pay for disability coverage but offer it as a voluntary benefit. This lets employees buy coverage through the employer’s insurance broker at a group rate.
- Buy disability insurance through a professional association. Many professional groups offer members coverage at group rates.
- Buy an individual disability insurance plan. You can get it from an insurance broker or directly from an insurance company. Big sellers of individual disability insurance include Guardian, MassMutual, Northwestern Mutual and Principal. Most individual disability policies sold are for long-term coverage, although some companies also offer short-term policies.
How to get disability insurance
Consider buying a policy if you don’t have any or enough disability coverage at work or are self-employed. Employer-sponsored disability insurance usually pays only a portion of your base salary, up to a cap. It’s a good idea to supplement that coverage if your salary far exceeds the cap or you depend on bonuses or commissions.
An insurer will consider other sources of disability insurance to determine how much coverage you can buy. Generally, you can’t replace more than 75% of your income from all the coverage combined.
Buying your own policy lets you:
- Customize the coverage with extra features, such as annual cost-of-living adjustments
- Choose the insurance company with the best offerings
- Keep the coverage when you change jobs. Employer-paid coverage ends when you leave the company. (You might be able to take the coverage if you pay the full premium for disability insurance offered through the workplace.)
- Control the disability insurance. The coverage stays intact as long as you pay for it. But employer-sponsored coverage will end if the employer decides to stop providing disability benefits.
- Collect benefits tax-free if you become disabled. If the employer pays for the coverage, you must pay taxes on the benefits.
The annual price for a long-term disability insurance policy generally ranges from 1% to 3% of your annual income, according to the Council for Disability Awareness. A variety of factors affect the cost.
- Your age and health: You’ll pay more the older you are and the more health problems you have
- Your gender: Women usually pay more because they tend to file more claims
- Whether you smoke: You pay less if you don’t smoke
- Your occupation: You’ll pay more if you work in a job with a high risk of injuries
- The definition of disability: The broader the definition of disability, the higher the premium. A policy that covers you if you can’t work in your own occupation but could earn income in a lower-paying job will cost more than a policy that covers you only if you can’t work at all.
- Length of waiting period: This is known as the elimination period. You can reduce the premium by increasing the waiting period before benefits kick in.
- Your income: The more income you have to protect, the more you’ll pay for coverage
- Length of benefits: The longer the period that the policy promises to pay out if you become disabled, the more you’ll pay in premiums
- Extra features: Additional features, such as cost-of-living adjustments to protect against inflation, will increase the premium
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