Whole Life Insurance: Everything You Need to Know Before You Buy
Life insurance is an essential aspect of a robust financial plan. But based on statistics, it may be even more important for you and your loved ones to carry a much less discussed financial product: disability insurance.
If you’re thinking about the best ways to protect yourself and your family financially from the risks of disability — even for a short period — it’s important to consider applying for disability insurance. Here’s what you need to know.
In this article
- Life insurance vs. disability insurance
- Under what circumstance would someone need disability insurance?
- How disability coverage works
- Should I get disability insurance?
- How to apply for disability insurance
- Life insurance riders that cover disability
- Bottom line
Life insurance vs. disability insurance
Life insurance and disability insurance are both designed to protect you or your loved ones from lost wages, but they have different purposes and kick in at different times.
Life insurance is meant to pay out a benefit to your beneficiary if you die during the term of the policy. For example, if you purchase a 30-year $250,000 term life insurance policy when you’re 35 years old and die when you’re 50, that $250,000 death benefit will be paid to the person or people you designated as your policy’s life insurance beneficiaries.
There are several different types of life insurance. Term policies provide only insurance protection and expire after the policy period ends. On the other hand, permanent insurance — such as whole life, universal life, or variable universal life — provides insurance coverage for the remainder of your life and also comes with a savings component.
The best life insurance can provide significant relief to your loved ones if you die. Your surviving family members can use a death benefit payout not only to replace your lost wages, but also to pay off debt, save for retirement and education expenses, and more. Insurance companies and their underwriters may place a limit on the coverage amount you can purchase, but that amount can still be several times your annual income.
Disability insurance works differently than how life insurance works. Instead of providing a death benefit, disability insurance coverage kicks in when you’ve suffered some kind of disability that prevents you from being able to work. Instead of paying out a lump-sum benefit, disability insurance provides a monthly benefit, typically up to 60% or 70% of your gross monthly income.
Depending on the type of disability insurance you have — short-term or long-term coverage — it may cover you for up to six months or for several years. Also, although some policies will cover you if you can’t work your current job, others may not kick in unless you can’t perform any job. The coverage will continue until you’re no longer considered disabled or until the end of the policy’s benefit period.
As long as you pay the premiums for the plan, your disability benefits aren’t taxable. If your employer pays for some or all of your disability coverage premiums, however, you may need to include some or all of the income on your tax return.
Although disability insurance doesn’t provide an inheritance like life insurance, it can make it possible to cover your living expenses and maintain your lifestyle — or at least something close to it — until you can get back to work or the policy expires.
Under what circumstance would someone need disability insurance?
Depending on how old you are, you’re as much as three-and-one-half times more likely to experience a long-term disability than to die prematurely, according to online insurance agency SimplyInsurance.com. What’s more, the average length of such a disability can be an extended period, ranging from about two to three years for people between the ages of 25 and 55.
Not being able to work at your own job or any other job for that long can have a significant negative impact on your ability to pay your bills. So even if you’re single with no dependents, it’s a good idea to consider disability insurance to protect your income.
It’s even more essential to have this kind of safety net when it comes to a family financial plan, especially if the family’s other breadwinner earns significantly less or there’s no second income-earner.
You may think that things like worker’s compensation and Social Security will have you covered in the event of an accident or illness, but that may not actually be the case and here’s why.
How disability insurance differs from workers’ compensation coverage
Disability insurance and workers’ compensation are two different things, and though they both provide monetary payments to help cover lost wages, there are significant differences:
- Reason for disability: The primary difference between the two types of coverage is that workers’ compensation covers you only if you experience a work-related injury — these injuries are typically temporary, and workers’ compensation pays for medical bills and lost wages. Disability insurance, on the other hand, covers you regardless of how the disability occurred.
- Length of coverage: Each state has its own limitations on how long workers’ compensation coverage can be paid out, but it’s typically only a handful of years. With some long-term disability policies, you can receive benefits for the rest of your life.
- Who pays: Employers are required to pay for workers’ compensation insurance, which means you don’t have to worry about applying for coverage. On the flip side, some employers may provide disability insurance as an employee benefit, but it’s not required, so you may need to purchase a policy on your own. Even if your employer does offer short- or long-term disability, you may need to pay part of the premium.
If you’re employed, you’re likely covered for workers’ compensation, but it’s still a good idea to also purchase disability insurance coverage.
What about Social Security Disability Insurance (SSDI)?
If your medical condition is expected to make it so you can’t work for at least 12 months or result in death, you may qualify for Social Security disability benefits. But this coverage isn’t available for people with short-term disabilities lasting less than a year.
Even if you do qualify for SSDI, it can take three to five months after you file your disability claim just to get a decision from the Social Security Administration, and disability payments won’t start until six months after the date your disability began.
Finally, the formula for determining your benefit is complicated and based on your average lifetime earnings covered by Social Security so it may or may not be an amount that covers your bills and provides for your family. You can use an online calculator to determine how much you qualify for.
You Can Skip These 7 Types of Insurance (and Save Money)
How disability coverage works
The general purpose of disability insurance is to replace a percentage of the policyholder’s gross monthly income, but there are several different features that come with a disability insurance policy.
Short-term vs. long-term disability
Short-term disability insurance replaces as much as 60% of your paycheck for up to three years, depending on the policy. These policies also typically have a waiting period of up to 14 days before you can start receiving payments.
With long-term disability insurance, you may be able to receive payments until retirement age if you have a permanent disability. That said, payments don’t typically kick in for several weeks or even several months, so it’s generally a good idea to have both types of coverage — or at least a robust emergency fund to help bridge the gap.
How disability insurance works with other types of coverage
Because disability insurance benefits don’t cover 100% of your gross monthly income, you may be tempted to purchase multiple policies to maximize your benefit payments. However, disability insurance benefits, including payments from the Social Security Administration, are typically reduced by other disability policies and even workers’ compensation payments.
In fact, during the application process for a disability insurance policy, you’ll be required to list other policies you currently have, and the benefit amount on those policies may limit how much you can qualify for on the new policy.
Other disability insurance policy features
If you’re purchasing a disability insurance policy through your employer, you may not have much control over the features of the plan. However, if you’re buying a policy on your own, here are some features and riders you should know about, and possibly purchase if it’s right for your situation:
- Noncancelable: This means you can renew your policy every year without an increase in your premiums or reduction in benefits, and the insurer can’t cancel your policy for any reason other than nonpayment of premiums.
- Guaranteed renewable: You have the right to renew your policy every year with the same benefits, and the insurer can’t cancel your policy unless you stop making payments. However, the life insurance company may increase your premiums over time as long as it does the same for others in your same rating class.
- Own occupation: With this provision, the insurer will deem you totally disabled if you can’t perform the duties of your current job, even if you’re able to work another job.
- Any occupation: If you have an any-occupation policy, you’re considered totally disabled only if you’re unable to perform the duties of any job.
- Additional purchase option: With this feature, you can choose to purchase additional coverage in the future without needing to undergo another medical exam.
- Cost of living adjustment: Typically called COLA for short, this feature increases your benefits over time based on the increased cost of living.
- Residual or partial disability rider: With this rider, you may still be able to collect benefits while working part time if you remain partially disabled.
- Return of premium: You can receive a refund of some of the premiums you’ve paid if you don’t file any claims during a period specified in the policy agreement.
- Waiver of premium: With this provision, you no longer have to pay premiums on the policy once you’ve been disabled for a set period.
Should I get disability insurance?
Disability insurance is an excellent way to protect yourself and your loved ones from long-lasting financial difficulties that can arise from a short- or long-term disability. However, although it may be more important than getting life insurance because of the likelihood you’ll need it, disability insurance is also more expensive.
It’s hard to pin down an average premium for disability insurance because your rate will vary based on your job, health, age, and several other factors. That said, many insurance experts estimate that a disability policy costs between 1% and 3% of your annual income.
That doesn’t seem like a lot, but depending on your situation and the rest of your expenses, it may not be affordable. Here are some tips to reduce the costs associated with disability insurance:
- Check with your employer. Ask someone in your human resources department if the company provides (or plans to provide) disability insurance as an employee benefit. Just keep in mind that if your employer pays for some or all of your monthly premiums, your benefit may be taxable. In that case, you could purchase a personal policy just to cover the taxable portion of your employer-sponsored plan.
- Go through an association. Some associations and unions offer group disability coverage to members. This type of plan acts like an employer-sponsored plan, which means you don’t need to jump through as many hoops — including a medical exam — to get approved. As an example, I purchased a plan through the Freelancers Union.
- Play with the provisions. The features you choose or your policy can alter how much it costs. For example, an any-occupation policy is cheaper than an own-occupation one because you’re less likely to experience a disability that makes it impossible to work literally any job. Also, skipping the COLA provision can save you money. However, skimping on these provisions can come back to bite you if you end up needing the coverage later on.
- Lengthen the elimination period or reduce the benefits period. A policy’s elimination period is the waiting period until the life insurance company starts making benefits payments. The longer this period is, the less expensive your premiums will be. And if you opt for a shorter period of benefits payouts, you can also save money. Just make sure you can cover yourself during these periods not covered by insurance. Otherwise, you may miss out on thousands of dollars in benefits just to save a few bucks each month.
How to apply for disability insurance
If your employer or an association or union you belong to offers disability coverage, it will provide you with an application to purchase the coverage you need.
If you don’t have the option to get group coverage, take some time to shop around and get quotes from several insurance companies. Many will allow you to request a quote online, which makes it easy to compare rates. During this process, make sure the features of each policy you’re applying for match so you’re comparing apples to apples.
You’ll typically need to provide some information about yourself — including your income and other financial assets and liabilities, as well as your occupation — for each insurer to provide an accurate quote.
If you can afford to purchase both life and disability insurance at the same time, applying for both with the same company may make it possible to use just one medical exam for both applications. You can also save time because you’re working with only one agent on both policies rather than two agents from different insurers.
Life insurance riders that cover disability
If you can’t qualify for a disability insurance policy, you may be able to add a life insurance rider to a new or existing life insurance policy. This supplementary benefit can provide some income replacement if you become totally disabled. Terms of the rider can vary by insurer, however.
Some permanent life insurance policies also include a rider that states that if you become permanently disabled, your life insurance premiums will be covered by the insurance company going forward.
If you’re trying to decide which types of insurance coverage you need, and you’re choosing between life insurance and disability insurance, the former may be cheaper, but considering the chances of becoming disabled versus dying prematurely, the latter may be more beneficial.
Understanding how disability insurance works can help you ensure you get the right policy and coverage, but there are ways to reduce your monthly premiums if you can’t afford a plan with all the bells and whistles. Also, if you can afford both life and disability insurance, both types of insurance coverage can help mitigate some or all of the financial risks associated with death and disability.
No-Hassle Term Life Insurance
- Leave your family up to $1,500,000 in life insurance
- Apply for a policy in under 5 minutes
- No medical exam required
- Policies start at just $10/month
What Is Uninsured Motorist Coverage and Is It Required?