The critical component to nearly every financial plan is income. Each month, your income helps you pay for the things that are important to you today while also funding future goals like home upgrades, your kids’ college education and retirement. Without that income, your financial plan can quickly fall apart.
That’s why disability income insurance is so critical to any financial plan. If an illness or accident keeps you from working, it can help you make up your lost income.
HOW DISABILITY INSURANCE WORKS
You may get some disability insurance through your work benefits package. But many people buy private disability insurance as well. Here’s how disability insurance works.
Your coverage lasts until a certain age. Disability insurance covers you until you reach a certain age — usually 65, 67 or 70. As long as you pay your premiums, your disability benefit is guaranteed should you have a qualifying disability. If you still need coverage once you reach your maximum age, you may be able to extend your policy.
Your premiums may be level or change over time based on your policy. With some disability insurance policies, you will pay the same premium every year for the duration of the policy; these are known as “level” premiums. Another type of policy is known as “annually renewable.” With an annually renewable policy, your premium payments will start out lower than they would with a level policy, but they will increase each year as you age.
There is a waiting period before you can collect your benefit. There are two primary types of disability income insurance: short-term and long-term. Short-term disability insurance covers you in the weeks following a disability, usually up to a period between three and six months. Long-term disability insurance covers you after that period, typically starting to pay a benefit 90 days after your disability begins.
There is a maximum benefit. If you ever need to collect your benefit, the company will pay it to you (typically monthly) for as long as you continue to be disabled, up to a certain point known as your “maximum benefit period.” With some policies, the benefit lasts for a certain amount of time, like two, five or ten years. But with many policies, the benefit lasts until you reach age 65 or age 70.
Private disability insurance is portable. When you get disability insurance through work, your coverage will typically end if you leave your job. When you get a private policy, your coverage can remain in effect no matter what happens with your situation at work.
WHEN TO REVIEW YOUR DISABILITY INSURANCE
While it’s a good idea to check in regularly (usually once a year) with your financial representative, in many cases you may not need to make changes to your disability insurance policy. But there are a few times when you may want to revisit your insurance coverage.
Income Increases. As you grow in your career, there’s a chance your income will increase, sometimes substantially. As it does, you may want to review your policy to make sure your disability insurance coverage is maximized, meaning you may add an additional monthly benefit.
Changes at Work. Over time, your situation at work may change. Your employer may change the disability coverage offered through the company. Also, you may decide to go part time, or you may start your own business. Any of these might affect the amount of disability insurance that you need moving forward.