Friday, 18 August 2017

We get up, we go to work, we get paid. But what if an injury or illness prevents us from working or reduces the number of hours we can work? Where will we get the money to pay our bills? It's a scary thought. 

It's also why you might want to consider disability insurance.

"Ideally, a disability insurance policy should replace all or most of the income you were earning before becoming disabled," says Amy Bach, executive director of United Policyholders, a nonprofit organization which advocates on behalf of insurance consumers. 

There are two basic types of disability insurance. Short-term coverage typically provides income for up to six months, while long-term disability insurance benefits "should be payable until retirement age or the rest of your life if you become completely and permanently disabled," says Bach.

How much do you need? 

"Different insurers have different ways of calculating your pre-disability income, but generally it will be keyed to the income you reported on your tax return," Bach says.

Obviously, the primary reason for purchasing disability insurance is to cover your daily living expenses if you are unable to work. Therefore, determining how much you need to cover those expenses is important to figuring out how much insurance coverage is appropriate. Disability insurance isn't inexpensive, so you probably don't want to pay for more coverage than you actually need. 

For example, if you are a married person with no dependents and your spouse also earns income, you could probably get away with insuring only a portion of your income. Whereas a single mother of three would probably need to make sure more — if not all — of her income is covered.

Many independent insurance agents can help you determine how much coverage you need and let you compare plans from a variety of companies.

Does your employer provide any coverage? 

According to the U.S. Bureau of Labor Statistics, 39 percent of employees had access to short-term disability benefits and 32 percent had access to long-term coverage in 2014. This does not necessarily mean the employer pays for the coverage, only that it is available to employees.

According to Bach, most employer plans base benefits on regular salary and don't include bonuses or other compensation. "If you want full income protection you may need to buy supplemental disability income protection on top of the group coverage," she says. 

You can find out if your company offers any disability insurance by speaking with your employer or, if you have one, your human resources department. 

What about people who are self-employed? 

Disability insurance is critically important for those who are self-employed because obviously employer-sponsored coverage isn't an option.

Bach says self-employed individuals need to pay extra attention to what's included in their coverage, for instance "whether the policy pays benefits if you're disabled from your occupation or only if you're disabled from any occupation."

She cautioned some policies will only pay if you're unable to work at all. For example, if a dentist can no longer practice dentistry but can still be a server in a restaurant, they might not be eligible for benefits. 

What's more, if you're considering becoming self-employed — like starting a business — it will be easier to get disability insurance before you set out on your own. 

Cover all your bases

It makes sense to have a fallback plan in case you can't collect a salary. In addition to disability insurance, a robust savings account to cover at least six months' of living expenses is ideal, as are assets you can liquidate without a tax penalty. 

The content provided is for educational and informational purposes only. Neither Compass Bank, nor any of its affiliates, is providing legal, tax or investment advice. You should consult your legal, tax or financial advisor regarding your personal circumstances. Opinions expressed herein are those of the author(s) and do not necessarily represent the opinions of Compass Bank or any of its affiliates. Insurance Products: ARE NOT DEPOSITS, HAVE NO BANK GUARNATEE, ARE NOT FDIC INSURED, ARE NOT INSURED BY ANY OTHER GOVERNMENT AGENCY, MAY LOSE VALUE