Section 01 What is disability income insurance?
Disability income insurance is designed to pay you a monthly benefit if you are disabled (injured or sick) with a qualifying disability and can’t work. That benefit will typically last as long as your disability does or up to a certain age, potentially the age you anticipate retiring.
There's a 1 in 4 chance that a 20-year-old entering the workforce today will become disabled before retirement
There are two types of disability income insurance, short-term and long-term. Let’s take a look at their differences.
As the name suggests, short-term disability insurance covers a portion of your income for a limited amount of time, typically three to six months. Short-term disability insurance is often offered through an employer and may work with other benefits, including your paid sick leave.
Long-term disability insurance kicks in if your disability lasts for a longer period of time, typically more than 90 days. You may be offered long-term disability insurance through work — however, it usually pays only a percentage of your salary. That’s why many people also get private disability insurance coverage to help bridge the gap.
Section 02 How much disability insurance do I need?
If you got into a car accident, would you want your auto insurance company to replace just a portion of your vehicle? What about your home — would you want just half of it rebuilt if it was damaged in a natural disaster? The same goes with your ability to earn money. How much disability insurance coverage do you need? The answer is likely to be “as much as possible.”
Generally speaking, short-term disability coverage through work replaces up to 80 percent of your income. That’s typically the best you’ll get when it comes to a short-term policy. Such benefits, however, are only payable for a limited period of time.
With long-term disability insurance you can usually cover most of your current annual income. But you may only be able to get this level of coverage by getting more than one policy, especially if what you’re offered through work covers only 50 to 60 percent.
What a 2-year disability could do to your finances
It can be easy to think that you can make up for the impact of a relatively short disability. But even two years out of work can make a huge difference in a long-term financial plan.
Take the example of Brea, a 25-year-old single woman who earns $54,000 a year. With student loans and other debts, Brea’s net worth (assets minus debts) is negative $7,500 today. But if she saves, pays down debt and continues to follow her financial plan, she’s projected to have $2.6 million by the time she retires. In four years, she would have a net worth of nearly $59,000.
But let’s say she becomes disabled for a little more than two years, starting now. Here’s the impact of a 2.1-year disability on her net worth. The blue line is what would happen without the disability. The red line is Brea’s net worth if she becomes disabled.
Brea’s net worth grows to only negative $2,905 in four years. That’s a difference of nearly $62,000. While it seems like she’d have plenty of time to recover before retirement, she will lose out on the compound interest she would have earned on her net worth. That amounts to nearly $335,000 less when she gets to retirement. Brea loses out because during her disability, she stops saving.
Section 03 What does disability insurance cover?
Disability insurance covers a broad range of common illnesses and injuries. In fact, at Northwestern Mutual, three out of four disability insurance claims by people who are 18 to 34 years old are due to illness, not injury.
And unlike worker’s compensation, which covers only injuries that happen on the job, disability insurance will cover your inability to perform your occupation as a result of things like heart conditions, injuries that happen outside work and some mental illnesses.
Basically, disability insurance covers a wide range of health issues and injuries that can prevent you from working. If you ever claim your benefit, here are some key terms to know.
Elimination period and beginning date
How long you’ll need to wait before the benefit kicks in. This exists with both short- and long-term disability insurance policies. The beginning date, which typically started after what’s known as the elimination or waiting period for short-term may be a few weeks or until you have used up your sick leave. With long-term, it’s usually 90 days or more after your disability begins. Benefits typically become payable on the beginning date, which is the day after the elimination period is met.
Maximum Benefit period
How long you can claim payments while you’re unable to work. With short-term disability insurance, the benefit period is usually short — enough to cover several weeks or until your long-term policy begins paying a benefit. With a long-term policy, the benefit period usually continues for a number of years, like 5 or 10 years or until you reach a certain age, such as 67 or 70.
Monthly Benefit amount
This is how much of your income your policy will cover. The benefit amount is usually a defined monthly amount that will be sent to you while you are disabled.
Section 04 Is disability insurance from my job enough?
If you get a benefits package through work, there’s a chance that your employer offers you a group disability insurance plan. But is that coverage enough? Probably not. That’s because disability insurance coverage from your job usually replaces only 50 or 60 percent of your income. And if you ever need to use it, your group disability benefit will be taxable — meaning you get even less. Plus, if you ever leave your job, it’s likely you won’t be able to keep your coverage.
That’s why many people get a supplemental disability insurance policy through a private insurer on top of the coverage they have through work. Between the two, you can cover more of your income, and supplemental policies have these added benefits.
Portable is insurance-speak for “you can take it with you.” Even if you leave your job, a private policy will continue to cover you as long as you pay your premiums.
Unlike a group policy through work, a benefit paid by an individual disability insurance policy that you pay for yourself is tax-free.
Section 05 Does short-term disability insurance cover maternity leave?
Growing your family is an exciting time — one that requires a lot of planning. You’ve set up the nursery, picked a short list of names and started babyproofing your home.
But do you know yet how you’ll pay for your leave? Federal law requires that most employers give you 12 weeks of unpaid leave and a guarantee of employment upon return — but there’s no law that requires paid leave.
If you have paid maternity or paternity leave as a company benefit, that’s great. It’s one less thing you’ll have to worry about. If you don’t, there’s a chance that your employer may offer short-term disability insurance to cover maternity leave (although it may cover only a percentage of your pay).
Check with your employer to see what’s available to you. It’s important to point out that short-term disability insurance may not cover your entire maternity leave. That’s because most policies will cover only the period you are considered disabled following the birth of your child. The typical time frame you are considered disabled following delivery of the baby, without complications, is six weeks, eight weeks if a C-section was performed.
If you don’t get short-term disability insurance through a work plan, it’s unlikely that a private short-term disability insurance policy would pay for maternity leave.
Section 06 How do I qualify for disability insurance?
If your employer offers disability insurance coverage, you will automatically qualify. Many employers offer group disability insurance, which covers their entire workforce. And as a result, factors like pre-existing health conditions or age shouldn’t stop you from getting this coverage.
If you are considering purchasing individual disability insurance coverage through a private insurer, factors like your health and profession are taken into consideration when the policy provider determines your eligibility. Depending on the level of coverage, you will likely have to take a health screening.
If you’re a part-time employee or a stay-at-home parent, it’s possible you may also qualify for a disability insurance policy.
Section 07 Conversation starters with an advisor
How would a disability affect my financial plan?
Is the disability insurance I have through work enough?
What type of coverage do I need for my profession?
Should a stay-at-home spouse have disability insurance coverage?
How long can I weather a big financial shortfall because of a disability?
How much money do I need to make ends meet if I’m unable to work?
To be used with form MN 992-STD, MN 992-LTD, MN 1096 SGSTD, MN 1096 SGLTD, ICC16.TT.DI.IIB.(0916), ICC16.TT.DI.FIB.(0916), ICC16.TT.DI.CAT.(0916), ICC16.TT.NCDI.(0916), ICC16.TT.GRDI.(0916), ICC16.TT.DI.PDB.(0916), ICC16.TT.DI.PDBO.(0916) or state equivalent. Not all contracts and optional benefits are available in all states. Disability insurance policies contain some features and benefits that may not be available in all states. The ability to perform the substantial and material duties of your occupation is only one of the factors that determine eligibility for disability benefits. These policies also contain exclusions, limitations and reduction-of-benefits provisions. Eligibility for disability income insurance, additional policy benefits, and qualification for benefits, is determined on a case-by-case basis. For costs and complete details of coverage, contact your Northwestern Mutual Financial Representative. Product availability is subject to state approval. Disability insurance policies contain exclusions and limitations that could affect individual coverage. For costs and more complete details, consult a Northwestern Mutual financial representative.
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life insurance, disability insurance, annuities, and life insurance with long-term care benefits)