It may feel like your chances of experiencing a significant injury or illness are unlikely, but research proves you're not so invincible. Did you know that 1 in 4 young adults will experience a disability for 90 days or more before reaching the age of 67? Yet Disability Insurance tends to be overlooked when compared to Life Insurance or Health Insurance. Accidents can happen to any of us at any given time, so if you’re wondering whether you need Disability Insurance, the short answer is “yes.”
What is Disability Insurance?
Disability Insurance pays a portion of your income if you are unable to work for an extended period of time due to injury or illness. If anyone relies on you financially, such as a spouse or children, disability insurance will ease the financial burden for your household as you recover.
The 2 Types of Disability Insurance
There are two main types of Disability Insurance policies:
1. Short-Term Disability (STD) – This type of insurance benefit pays a percentage of your compensation if you become injured or ill from non-job-related activities, and consequently are unable to work for a limited time period. This insurance policy excludes job-related injuries, which are covered by workers compensation insurance.
2. Long-Term Disability (LTD) – This type of insurance benefit pays you monthly income when you are unable to work due to a covered total disability.
How much does It cover?
Up to 100% gross monthly income
Up to 60% gross monthly income
How long do I receive benefits? (Benefit Period)
2 years or longer if disability continues
When do I start receiving benefits? (Elimination period)
Around 7 days from the time your doctor confirms you have a disability
Typically, around 3-6 months
How much does it cost? 1
1-3% of your annual income
1-3% of your annual income
Why do I Need Disability Insurance?
If you have a job or have financial dependents, a Disability Insurance Policy should be strongly considered. Without a policy in place, you face the risk of being unable to pay bills, support your family, and all together threaten your financial security.
Research indicates the likelihood of becoming disabled for an extended period at some point in your careers is a lot higher than you may think. In the early or middle stages of your career, your ability to earn income is likely your most valuable asset, so having adequate protection is especially important during this time in your life.
Don’t make the mistake of thinking that you won’t benefit from Disability Insurance because you don’t work a dangerous job. The majority of long-term disabilities are a result of illness, not injury-related accidents. This means you should have disability insurance regardless of what your occupation is.
Consider Supplemental Disability Insurance
Individuals often assume that their disability benefit offered through their employer will provide enough coverage in the event they are sick or injured and unable to earn an income. However, keep in mind, most employer sponsored long term disability plans normally only cover 60% of their eligible income, resulting in a 40% reduction in your income, and this is before taxes. In other words, if your employer is providing your disability coverage, this would most likely mean any benefit paid out would be subject to income tax, further reducing the amount you actually receive. If your employer provides you the option to pay for a Long-Term Insurance policy post tax, it’s to your advantage because post tax premiums mean tax free income benefit. In other words, if you’re paying for a post-tax premium on long term insurance, your 60% will be paid to you tax free, meaning you’ll net the full 60%.
It may make sense for you to consider securing additional coverage, referred to as supplemental insurance, through the use of an individual disability policy. This coverage could provide the additional necessary income to meet your needs.
While everyone understands the importance of life insurance and securing coverage in the event of death, not so many people consider securing coverage in the event of an injury or illness. Disability Insurance shouldn’t be overlooked because you’re actually more likely to be injured during the course of your career than you are to die.
Unfortunately, many people make the mistake of procrastinating purchasing a disability insurance policy. It’s important to be mindful that as you age, the premium for a disability insurance policy increase. As your health begins to decline, it can be difficult to qualify for any policy. The younger and healthier you are, the easier it is to secure coverage. Disability income insurance has certain limitations and exclusions. The definition of a qualifying disability will vary by policy.
Check out our advisor’s web pages and schedule a call with Archstone Financial to discuss how disability income strategies could help meet you and your family’s needs.
1 "Long Term vs. Short Term Disability Insurance - FindLaw", 2020