Most of us understand the importance of life insurance, but what many of us overlook though is disability insurance. There’s a much greater chance that we’ll become disabled in our working years as opposed to us dying before the age of 65 so it’s a huge mistake to not have disability insurance.
Disability insurance comes in a few different forms. There’s short-term disability (STD), long-term disability (LTD), and critical illness. They all cover us from accidents and illness, but how much they pay and what they cover are different. Which policy should we get? Well it would be a good idea to have all of them, but more importantly we should understand what exactly the policies cover.
Short-term disability insurance
Most people confuse this with workers’ compensation, but it’s very different. Workers’ compensation provides us with an income and medical benefits if we’re injured on the job. By claiming worker’s compensation, we give up our rights to sue our employer for negligence; this might be a major issue for some people.
Short-term disability on the other hand will cover our wages in the event of any illness or accident that prevents us from working. STD insurance will pay about 70-90% of our regular income for roughly 90 days. Each policy is different so it’s important to read the fine print of our policies. Some employee plans can be very generous, but we need to make sure that the policy will pay enough for us to maintain our standard of living.
Long-term disability insurance
As the name implies, long-term disability covers any extended amount of time where we’re unable to work; think 90+ days. The payout is lower than STD, and it usually only covers 40-70% of our income. LTD insurance gets packaged with STD so you would get paid out the higher rate first before LTD kicks in. The nice thing about these insurance policies is that it covers us from any accident. Say we slip on some ice and require extended rehab, STD & LTD would help give us peace of mind since we would still have some money coming in.
Similar to STD, knowing our policy details is paramount. Our employer may offer insurance, but will the payout be enough to cover our expenses? Some policies have caps; what that means is that regardless of our income, we may only get paid a fixed amount. This might not be an issue for some people, but it may not be enough for some families so it’s probably worth purchasing a separate policy for the extra payout.
Critical illness insurance
Critical illness insurance pays us a fixed amount in the event we’re diagnosed with a serious life threatening illness. The most common illnesses would be cancer, heart attacks and strokes, but there are other conditions that would also give us a payout. Each illness has an assigned lump sum and even if we survive, we still get paid.
The insurance is meant to help survivors with any immediate medical costs, or to help our family if we pass away. The money does not need to be spent on medical related items, it’s meant to help replace lost income, or to pay off mortgages. Just like STD and LTD insurance, payments aren’t automatic with critical illness insurance; we would still have to make a claim before we can collect our payments.
Critical illness and disability insurance differ from life insurance since it protects from different things. Having the right insurance policies in place is vital since we’ll never know what will happen in our lives. Our biggest source of income isn’t our jobs, it’s our ability to work. If we’re injured and unable to work, then how will we make an income? Don’t underestimate the value of insuring yourself.