Paying Your Bills When You Can't Work
Kids can take dramatic falls and stand right back up again, but we lose that Gumby agility as we become adults. What happens if you break a leg, arm or hand during a family ski trip—or both legs or hit your head in a car accident—and can't work for weeks or even months? Further, injuries aren't always sudden and cataclysmic. Many people who do repetitive motions with their hands or wrists throughout the day find themselves in need of carpal tunnel surgery years later. If injury or surgery keep you from working for a long period of time, how will you pay your bills?
The Purpose of Disability Insurance
These types of situations are exactly what disability insurance is designed to deal with. It pays you a percentage of your salary if you are injured, ill or debilitated and cannot work, and therefore won't be receiving a paycheck. If the full use of your hand is required for your job, you can tap into your disability insurance while your hand heals. On the other hand (pun intended), if you're a teacher who can write fairly well with your non-dominant hand, you may be able to continue to work and receive your paycheck. Disability insurance may pay you a portion of your salary during a pregnancy or maternity leave, too.
The Long and Short of It
There are two main types of disability insurance: short term and long term. Short-term disability insurance usually replaces 80 percent or more of your salary for up to 180 days, depending on the policy. There is typically a waiting period of five to 15 days after your disability begins before you can access the insurance.
If you still can't work after 180 days of disability, long-term disability insurance can come to your rescue. Long-term policies cover only about 50 to 60 percent of your salary, compared with the 80-plus percent coverage from short-term policies. However, long-term coverage can continue for a longer period of time—perhaps until you reach age 65 or even for the rest of your life.
Every policy is different, so it's important to check the specifics of any short-term or long-term disability policies before purchasing them.
Some Employers Offer Coverage
Many employers offer disability insurance as part of their benefit plan to employees. The employer may pay the entire premium for the insurance, or pay for part of it while you pay the rest. Alternatively, it may be available, but you have to pay all of the premium.
Since it's a group policy, the premiums are probably cheaper than the fees for an individual policy on your own, so see if disability insurance is offered through your employer. Be aware, though, that if your employer pays for all or some of the premium, you may have to declare that on your taxes.
Some States Require Coverage
The Society for Human Resource Management states that California, Hawaii, New Jersey, New York, Rhode Island, and the Commonwealth of Puerto Rico require workers to be covered by short-term disability insurance. Depending on the state, coverage is either paid by the state, which may deduct a contribution from your paycheck, or by the employer, who may ask employees to pay part of the premium. If you live in one of these states and aren't sure of your coverage, ask your Human Resources representative how the company handles the requirement.
Own Occupation, Any Occupation
It's important to find out how each policy defines being too disabled to work. If the term's definition includes the inability to work in your own occupation, such as a surgeon who can no longer perform surgery, then you're considered disabled if you can't work in your field as a surgeon.
If, instead, the policy defines disability as not being able to work in any occupation, you'll have to look for other kinds of work before being considered disabled. So the surgeon who can no longer work in surgery, but is offered work in the surgeon's office or as a medical instructor, for example, would not be considered disabled because she has job opportunities that she could perform.
Disability Insurance Trends
In recent years, insurance companies have increasingly made individual agreements with policy holders who became disabled. For example, the surgeon who takes a different job would not earn as much as he earned as a surgeon. In cases like these, the insurance company may offer to subsidize his salary to bring his earnings closer to his earnings as as a surgeon.
Other times, the insurance company may offer a one-time, lump-sum settlement instead of paying you every month for the rest of your life. Some companies even offer to subsidize the salary of a policy holder who goes back to work, even part-time, instead of staying on disability. It's considered an incentive to get people working and avoids the insurance company having to pay the full insurance benefit.