If 2020 has taught us anything, it’s that no one can put off buying disability insurance any longer

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The World Bank defines human capital as “the knowledge, skills, and health that people invest in and accumulate throughout their lives, enabling them to realise their potential as productive members of society.”

Our greatest asset is our human capital. Yet only about a third of US workers protect this asset with long-term disability insurance. Most people cannot afford to live without a paycheck, yet we haven’t protected our income with the right type of insurance. Disability is one of our biggest financial risks, more likely to arise from illness than an accident, and considerably more likely than an early death.

Given the instability caused by the pandemic and the potential for long-term illness, disability insurance is worth considering before the end of this year. If you don’t have long-term disability insurance through your employer, or if your coverage isn’t sufficient, an individual long-term disability policy may be right for you.

Here are some questions to consider when evaluating your disability insurance needs.

What is your individual risk?

According to the Council for Disability Awareness, the average duration of a long-term disability claim is approximately three years and most likely to result from musculoskeletal disorders, including arthritis and back problems, as well as cancer and strokes. More than 25% of today’s 20 year olds will become disabled before retirement.

The Council for Disability Awareness also utilises a “personal disability quotient” to help determine your chance of becoming seriously ill and unable to work for an extended period of time. It considers things like age, type of work, BMI, tobacco use, lifestyle and medical conditions. You can use this form to get a sense of your risk.

How expensive is disability insurance, and how much do I need?

Individual policies usually cost anywhere from 1 to 6% of the benefit amount and are based in part on age, sex, occupation, the length of the coverage period, and the amount of income replacement.

Women can anticipate paying approximately 30% more for disability insurance, as we are statistically more likely to need it. The opposite is true regarding life insurance. Be sure to check associations and clubs you belong to, as they often provide access to more affordable coverage.

Insurance companies typically replace around 60% of lost income, as they want to provide an incentive to return to work. Individual policy benefits usually max out around $US20,000 a month. For highly compensated people, it may be necessary to “stack” policies to obtain higher monthly coverage. If this applies to you, be sure to work with a qualified independent insurance agent.

When thinking about how much you may need, take note of your critical expenses — things like housing, food, utilities, transportation, childcare, etc. Don’t overlook the need to continue to save towards retirement, and be sure to factor that in as well.

From this sum, consider any income that may offset some of these expenses, like your partner’s income, existing disability coverage, rental income, etc. Make sure to adjust these amounts for any taxes owed. Next, calculate the difference between your expenses and income. This simple calculation can help target the right amount of insurance coverage to obtain in an individual policy.

Do I need an individual policy if I have coverage through my employer?

Disability insurance is most cost effective when obtained through an employer. Group policy long-term disability benefits are convenient, inexpensive, and do not require a medical exam. Despite these benefits, there are drawbacks to consider.

One of the most important features of a disability policy is its definition of disability. This can vary from one policy to another. To get the most protection, you’ll want “own occupation” coverage. Essentially, with that type of coverage, you are not expected to work outside of your regular occupation.

Most employer-provided coverage maintains this “own occupation” definition for two years, and then switches to a more liberal definition of “any occupation” thereafter. This means that after two years, you would only receive benefits if you were unable to engage in any kind of work, regardless of your education and experience.

Additionally, coverage available through an employer tends to cap benefits, omit incentive-based compensation like bonuses and commissions, limit the benefit period, and make benefits taxable, and doesn’t stay with you if you leave the company. You’ll also want to understand if your policy offsets the monthly benefit with a Social Security disability benefit, as most employer policies do.

What other items should I consider?

There is no standard disability insurance policy or single ranking of the best disability policies or insurance carriers, as insurers tend to differ in their offerings and prices. For example, one carrier might focus on professionals with physically undemanding office jobs, while another carrier might be a better fit for sales/commission people with variable income.

Before you purchase a policy, it’s prudent to check the insurer’s financial strength rating through Moody’s or AM Best.

When I purchased my own individual long-term disability policy through an independent agent, I went with a strong and reputable company, 90-day waiting period, coverage to age 65, and a future purchase option. I have more than a 20-year runway before retirement, and I’ve worked too hard to not insure my own human capital. After all, I have young twins to chase after.

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