Do You Have Enough Disability Insurance to Pay Your Mortgage

Most workers depend on their paychecks to cover their mortgage, pay other household bills, and put food on the table. This means if you become disabled and are no longer able to work, you need some type of backup plan to keep your head above water. Many companies provide disability insurance to their employees, but the coverage may not always be sufficient. This is particularly true for local, state and federal government employees, as well as those who are self-employed.

What is Disability Insurance: There are two general forms of disability insurance: short-term and long-term. Short-term disability (STD) becomes available almost immediately after a covered illness or injury, and lasts for up to two years. Long-term disability (LTD) is only available after a waiting (aka “elimination”) period, which can be as much as one year or longer. To ensure you are fully covered, it is best to carry both types of policies.

How Much Does Disability Insurance Pay: Employer-provided disability plans typically pay anywhere between 50% and 80% of your pre-disability earnings, up to a certain maximum amount. So although these plans might cost less than what is available on the open market, you need to look closely at the terms and conditions of the specific policy to determine if it provides enough coverage to pay essentials such as your mortgage.

One large entity that offers insufficient disability coverage is the federal government. The federal government provides no short-term disability option at all. If you have been employed at least 18 months and your disability is expected to last for over a year, you can receive long-term disability coverage through the Federal Employee Retirement System (FERS).

In the first year of coverage through FERS, workers are paid a benefit of up to 60% of their income. This benefit is taxed, so your net receipt is far less than 60%. Worse yet, in the second year of coverage, the benefit is reduced from 60% to 40%. Unfortunately, not too many employees can keep up their mortgage payments with 40% of their current income (before taxes).

For self-employed individuals, the situation is even worse. If you are self-employed and you do not have a disability insurance policy, there is no safety net for you. Regarding the primary breadwinner in the family, a 100% loss of your income would make it very difficult to keep your home.

What About Workers’ Compensation or Social Security Disability: Some employees believe they will be covered for an illness or injury through workers’ comp or Social Security. While it is possible you might be eligible for one of these programs, it is not wise to count on being available if you need them. Workers’ compensation is only available for work-related injuries or illnesses, and there are certain restrictions that can lower your chances of being approved for benefits.

Social Security Disability (SSDI) is even more difficult to become approved for than workers’ comp. Roughly 70% of SSDI claimants are denied benefits in their initial application. After the initial denial, there is a long and convoluted appeals process that can take months (or even years) to successfully navigate.

Disability policies from work are filled with holes, and it is far from guaranteed that worker’s compensation and/or SSDI will help in any way to fill the gaps. If you are an employee (for a private organization or government entity) or you are self-employed, it is best to have your own disability insurance to ensure you have the coverage you need. To find the right disability policy, speak with your independent insurance agent. Your independent agent can shop several of the top insurance carriers in your state to find the policy that best fits your needs and budget.