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When you consider that by the time you reach age 30, you’re more likely to be disabled than to die before you reach age 60, you realize your insurance safety net might have some holes. While almost everyone understands the importance of life insurance, disability insurance is too often overlooked. Consider these numbers:
- 70% of the private sector workforce (folks who don’t work for the government) have no long-term disability insurance.
- One in seven workers can expect to be disabled for five years or more before retirement.
- The average long-term disability absence lasts 2.5 years.
- Loss of income due to disability was a major factor in 50% of all mortgage foreclosures.
Long-term disability insurance replaces your income when you are unable to work due to an injury or medical condition. If you’re thinking Social Security or Workers’ Compensation will cover that, here are some more numbers to consider:
- Only 38% of the 2.3 million workers who applied for Social Security Disability Insurance benefits in 2008 were approved.
- For those approved, the average monthly SSDI benefit was $1,064.
- Only 10% of disabling accidents or illnesses are work related—Workers’ Compensation doesn’t cover the remaining 90%.
So, it’s clear that any sound financial plan should include disability insurance. Before you rush out to buy it, take a look at some dos and don’ts:
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DO buy and carry long-term disability your entire life. It’s much less expensive if you can buy it through your employer. If you can’t get it through work, talk to your human resources department about adding it.
DON’T buy disability insurance with pre-tax dollars because it makes your disability income taxable.
DO buy as much coverage as you can, usually 60–70% of your income.
DON’T buy short-term disability insurance. It will only cover you for three years at most. A fully funded emergency fund will fill in the gaps if you are unable to work short-term.
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DO build up your emergency fund of three to six months of expenses, because long-term disability benefits won’t kick in for 30–180 days after you file your claim. Insurance companies call this an elimination period. Use your emergency fund to cover your expenses during that time.
DO compare policies with different elimination periods. Generally, the longer the elimination period is, the lower the premium will be.
DO look for non-cancellable policies that can’t drop you if your health changes. Make sure this feature doesn’t drastically affect your premiums.
DO contact an insurance professional to help you find the best policy if you don’t have the option to buy through your employer. Dave's recommends contacting Zander Insurance for their great rates and excellent service. They can answer all your questions about long-term disability insurance.