What would you say is your most valuable financial asset: your house, your car, your retirement account? For most people of working age, the answer isn’t in their golden eggs, but in the goose that laid them: Their most valuable asset is their ability to earn money.
That’s why one of the most financially devastating events that could befall a household is when a breadwinner becomes disabled for an extended period and can’t earn any more money. That applies to all workers, not just those approaching retirement. And it’s especially true for Americans living paycheck to paycheck with no savings to rely on.
So personal finance experts and consumer advocates try to hammer home the importance of long-term disability insurance, which pays a portion of your income if you’re disabled either through illness or injury.
Although many people carry life insurance, you’re three times more likely to become disabled for a year before age 65 than die, according to a recent report by Sun Life Financial.
“Every consumer is vulnerable,” said Stephen Brobeck, executive director of the Consumer Federation of America, which advocates that more employers offer group disability insurance and the government offer tax incentives to small businesses to help them afford to offer it. “The probability of being out for an extended period of time applies to all Americans.”
The good news is that if you work for a relatively large company, you probably have disability insurance and your employer pays for some or all of it. But all told, only three in 10 American employees have it. Here are a few basics.
• What it is: Long-term disability insurance refers to payments you receive after being out of work, typically for three months or longer, with a disability. Payments are often equal to 60 percent of income, which isn’t full replacement of income but can help many households get by. You typically can’t get full income replacement because insurers want you to have an incentive to go back to work when you are well. It’s usually worthwhile to pay extra through an employer to get more salary replacement — say, 70 percent — if you have the option, experts say.
• What it’s not: Disability insurance is not about getting paid after being injured on the job. That’s workers’ compensation. The vast majority of injuries and illnesses causing work loss are suffered away from work. Social Security Disability Insurance is different too. It might provide a source of income, but it is difficult to qualify for. And payments average only about $13,000 a year, according to the Consumer Federation. A different kind of insurance is short-term disability, or what many employers call sick leave. And disability insurance is not about paying medical bills if you’re disabled. That’s health insurance.
• Who needs it: Working people, especially singles or breadwinners in single-income households.
• Where to get it: The easiest and least expensive way to get coverage is through an employer’s group plan. “The best place to get both the information and the highest value coverage is probably in the workplace,” Brobeck said. If your employer doesn’t offer it, try trade or professional associations or small-business organizations you belong to. Sometimes you can get it through a bank or credit union in association with a loan you have with that institution, he said. Failing those options, you can buy an individual policy. One advantage of an individual policy is that payments are not taxable. Payments through an employer plan are taxed, effectively giving you a smaller payout. And an individual plan is portable, meaning you take it with you from job to job.