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Two Minute Money: What is disability insurance?

Welcome to Two Minute Money, Yahoo Finance’s new personal finance series offering quick explanations for some of the most important questions involving your money.

You’ve got a good job, and the pay is great. But what if you get injured or disabled?

Your health insurance will cover some of the medical bills, but what about any lost wages? There’s a way to insure you still have money coming in case of a disability. It’s called—you guessed it—disability insurance. It goes without saying that having an income is important, and a disability could be more than just a one-time event. It could affect you for months or even years.

Disability insurance keeps money coming in if you get hurt or injured.

There are two kinds of disability insurance: own occupation and any occupation. Own occupation means if you can’t do your current job, the policy will help cover your lost wages. An any-occupation policy covers you if you cannot do any kind of work. If you can work at a job other than your own, an any-occupation policy won’t pay out.

Check to see if your employer offers disability insurance. Some companies do, but be sure to read the fine print. It may be a good idea to get your own plan on top of the one your work offers.

Social Security does offer disability payments but only if you’re expected to be out of work for more than a year. About 3% of the country receives Social Security disability payouts.

Short- and long-term plans

Next you’ll need to choose between short- or long-term insurance coverage. Short-term typically covers a period of less than six months—this is best for short illnesses or injuries that can heal quickly. The median payout for a short-term plan is 60% of your salary.

But what if you suffer a more serious disability, such as the loss of a limb? That’s where long-term disability insurance can help. Long-term insurance lasts the length of disability or until you retire.

Find your magic number

If you decide to get disability insurance, you’ll need to figure out how much you’ll need. To figure that out, let’s do some math. Take your income and subtract any reductions in spending you’ll be able to make (like gas for driving to work or lunch out every day). Then subtract any additional income you have, such as returns on trading accounts or a work disability insurance plan. That’s your magic number.

Buying into disability insurance might not be for everyone. The Bureau of Labor Statistics shows only 33% of private industry employees have long-term insurance and 39% of have short-term insurance. Only you can determine if disability insurance is right for you, but it could help keep you afloat after an illness or injury.

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