When you think of insurance coverage, the two most common types, besides health, is home and car insurance. The mortgage company requires the former, and the law requires the latter. However, without earning potential, it would be difficult for many of us to maintain our homes and automobiles while still providing for our families. The solution for supplementing this missing income in the event of a permanent or temporary disability is known as disability insurance.
Social Security and Disability: Many U.S. workers take disability risk management for granted because they assume that Social Security will take care of everything should they become disabled. Contrary to popular belief, qualifying for Social Security disability benefits can be challenging, and often takes time for the benefits to start. To qualify, you must prove that you are incapable of performing any job, not just your primary occupation. As long as you can be gainfully employed, even if it’s working for minimum wage, you won’t be able to collect Social Security disability payments. The Social Security Administration (SSA) will only consider a person to be “disabled” if all of the following requirements are met:
• He or she lacks the ability to engage in any substantial gainful activity (SGA)
• The incapacity is due to one or more medically determinable physical or mental impairments
• The incapacity has lasted or can be expected to last for a continuous period of at least 12 months or to result in death
In order to meet the requirements for disability coverage under Social Security, applicants must pass a “recent work” test based on age at the time they became disabled. And even if you are eligible for benefits, it’s highly unlikely that the benefit will meet your financial obligations – the payment for an individual who earned over $95,000 per year before becoming disabled is only $2,224 per month as of 2010.
Protecting Your Family and Income: When reviewing disability insurance, you need to take a close look at your emergency reserves and liquidity capabilities. If you became disabled and qualified for a maximum SSA monthly payment for your age and income, would this be enough income to support your budget? According to the U.S. Census Bureau, the average median monthly household income was $4,200 in 2010. This data strongly suggests that a supplemental income source would be a necessity for many Americans if they were to become disabled. It’s also important that you understand the benefits provided by your company, as you may be covered under a short-term (90 days or less) or long-term (90 days or more) disability policy through your employer benefits plan.
How much coverage should you consider?
You should consider obtaining enough coverage to maintain your family’s current standard of living. While gauging your required amount of replacement income, it is best to err on the side of conservatism. Recognize that you may save on certain living expenses (such as driving to and from work every day) that may reduce the amount of replacement income you will need to maintain your family’s lifestyle.
For how long will an individual policy pay a benefit?
Since there are many different options for this, you can select the period of time for which your benefit will last. The best policy would entail benefits being paid until you reach age 65, at which time retirement benefits should become accessible to you. You’ll also want to consider a plan that defines “disabled” as unable to continue work in your current profession – known as “own occupation.” Otherwise, if you choose “any occupation,” you’ll need to be unable to perform any type of work in order for the policy to pay any benefits.
The overall decline in the number of insurance companies writing disability insurance in the last 20 years has resulted in the cost and frequency of disabilities among workers to increase. Hopefully, you and your family would be taken care of, but if you’re not sure that’s the case, now might be the time to cover that risk. After all, part of being a parent is making sure that your family is protected and not unduly burdened by risks you can’t afford to take.
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