If you’ve ever been unemployed, you know what it’s like to live without a paycheck. The bills hit your mail box at the same pace, but your bank account certainly isn’t keeping up.
Now imagine that you go without income for months, or even years.
The bank reclaims your car. Your mortgage goes unpaid, and in six months it will be on the auction block. Everything you spent years waiting for vanishes before your very eyes.
I’ve been fortunate in that I’ve never dealt with unemployment – at least not the typical kind. But after nearly 2 years of being self-employed, I’m definitely well-acquainted with the stress of a fluctuating income that doesn’t necessarily line up with the due dates on my bills. And since I don’t have an employer to provide income protection in the event of a serious sickness or injury, it’s up to me to research the best options to keep myself afloat in an emergency.
There’s a safety net for that
While you can’t protect yourself from generate unemployment, you can protect yourself from illness and disability. The reality is that disability is a common problem, and the financial consequences are devastating. According to the Wall Street Journal, the average length of a disability is 2.5 years.
Let that sink in: 2.5 years without a paycheck, with no income coming in.
Even if you’re the most financially savvy individual, an emergency fund will hardly cover expenses for more than 2 years. And if you’re a solopreneur like me, one disaster (as I recently learned) can wipe out the savings you do have before you know what hit you.
How disability insurance works
Disability insurance is an extremely straightforward insurance product. Unlike life insurance, it doesn’t take a physical exam and an Eiffel Tower-sized stack of paperwork to purchase.
Disability insurance typically costs between 1-2% of your annual income. Younger workers who work in relatively safe careers (office workers) pay very little for disability insurance. The risks are low, so the premiums are too. I was able to find a plan at an extremely affordable rate since (1) I work from home and (2) my job involves sitting at a computer all day.
Claiming disability is as simple as getting a doctor’s note. If your family doctor believes your injuries or illness can keep you from work, your claim can get started immediately. It is substantially easier to claim disability through private insurance than from Social Security and other government programs.
A typical policy covers between 60 and 75% of your annual pay. Rarely will you find policies for 100% coverage, since higher payouts increase the risk of fraud. A policy that provides 60-75% of payment protection combined with a 6 month emergency fund will give you 15-24 months of your current income before your emergency fund is exhausted.
What to look for
Two common limits on disability insurance should be inspected carefully. First, look for the policy’s payout ratio as a percentage of your current income. You should seek a minimum of 60% replacement. Secondly, look at the lifetime and per-incident cap. A lifetime cap of 5 years, for instance, means that you cannot claim disability payouts for more than 5 years during your life. A per-incident cap of 12 months limits your disability payouts to 12 months each time you are legally disabled.
Finally, be sure to shop around. A quick search for disability insurance carriers and their customer reviews will ensure that you get the most bang for your buck. Don’t be afraid to pay up for a carrier with better reviews. The last thing you want to do is buy insurance from a company that will make it difficult to claim your benefits when you can’t work.
Finally, take time to understand the ins and outs of your policy, as well as review the documentation for any changes upon renewal. If you don’t know exactly what you’re supposed to get in the event of an emergency, you risk being blindsided by a policy that may not even come close to meeting your financial needs. While we all like to think it couldn’t happen to us, a little effort will go a long way in keeping you afloat should the worst happen.