Thoughts on Disability Insurance

Insuring against the unexpected is a vital element of any financial plan. For the most part, individuals are familiar with life insurance and health insurance policies, but take little action to protect their greatest asset—their ability to earn an income. Disability insurance hedges against this risk by providing income replacement should illness or injury jeopardize the physical capability to work.

It’s easy to disregard the need for disability insurance if you don’t have a physically risky job or are relatively young and healthy, but according to the Social Security Administration, more than one in four 20 year olds will experience a disability for 90 days or more before they reach age 67. Do you know what you would do if you were suddenly unable to continue earning your income for months or years on end? How long could you currently survive without your paycheck?

Types of Disability Insurance

Disability insurance provides full or partial income replacement in the event an individual is unable to continue working and earn his or her usual wages. Sometimes disability policies are provided or offered as a benefit through an employer, but can also be purchased independently through an insurance carrier. Of course, there are different types of disability insurance with varying degrees of requirements, waiting periods, and benefits, so due diligence should be done before investing in a policy.

1) Short-Term Disability Insurance: Short-term policies generally replace anywhere from 40% to 80% of your pre-tax income for a limited time period, usually anywhere from a few months up to one year. As with all disability insurance benefits, there is a waiting period between the time of the injury and the time an individual qualifies to begin receiving benefits. For short-term policies, this is often only a few weeks.

2) Long-Term Disability Insurance: While some long-term plans are offered through employers, more comprehensive benefits are often obtained through privately purchased plans. The price and promised benefits vary greatly, based on:

  • Length of Coverage: The longer your policy promises to pay out, the higher your premium will be.
  • Length of Waiting Period (aka Elimination Period): Longer elimination periods can reduce the premium cost.
  • Income Coverage: As with any insurance policy, the higher the benefits payout, the higher the premium. The more income the policy has to cover, the higher the premium will be. As a general rule, though, long-term disability insurance generally costs about 1%-3% of your income.
  • Definition of Disability: Each policy will have its own definition of what qualifies as a disability. Essentially, the broader the definition of disability, the more that coverage will cost. Some policies will provide income only if you are unable to work at all, while more costly policies will provide income replacement even if you are physically able to work but not necessarily complete your current job. For example, a surgeon who can no longer perform surgery may still be able to practice medicine as a general practitioner; however, this move will likely come with a significant decrease in income. In such case, disability insurance could help bridge the gap in income change.

3) Other Sources of Disability Insurance:

  • California, Hawaii, New Jersey, New York and Rhode Island (and Puerto Rico) have State Disability Insurance programs which replace a certain amount of income for an individual who is unable to perform their tasks at work and has contributed to the program through wages taken from their paycheck for a certain amount of time. The amount of benefits varies from state to state and individual to individual, but doesn’t cover wages for more than 6 months to a year.
  • All states require employers to provide workers’ compensation for their employees; however, most long-term disabilities are not the result of work-related injury.
  • Social Security will pay disability benefits in very rare cases, but the average monthly benefit is very low, averaging around $1,000 a month. It’s incredibly difficult to qualify for these benefits and the application process is very time-consuming, meaning an individual could be waiting for a very long time without income before receiving an eligibility response.

When it comes to putting a financial safety net in place, protecting your paycheck should be at the top of the list. Everyone who relies upon earned wages should carry this risk mitigation tool in order to be able to cover their basic living necessities should illness or injury prevent them from performing their working duties.

Do you have a plan in place to protect against the loss of your income? If you need to put a policy in place or are unsure if your current policy will meet your needs, we’d be happy to discuss your options with you. Contact us today to schedule a Complimentary Discovery Call with one of our trusted advisors.

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