Do I Need Disability Insurance?

For most people, their most valuable financial asset is their ability to make a living. If you rely on a paycheck for everyday and recurring expenses, it is important to have disability insurance. Disability insurance pays a portion of your income if you cannot work for an extended period due to illness or injury.

When I meet with young healthy clients, the chance of missing months or years of work due to an injury or illness often seems remote. But more than 25% of 20-year-olds will experience a disability before reaching retirement age (according to the Social Security Administration). People often shrug off the risk by focusing on worst-case scenarios (spinal cord injuries leading to quadriplegia or accidents that result in amputation). But back injuries, cancer, heart attacks, diabetes and other illnesses lead to most of the disability claims.

Most disabilities are short-term, and many are partial in nature. The probability of disability lasting five years or more is 35 percent (ages 30–34) to 43 percent (ages 45–49). The average length of disability ranges up to 86 months before age 49. But even with a short-term disability, what would you do if you could not work? What would be the monetary impact on you and your family if you no longer earned a paycheck?

Types of disability insurance

There are two main types of disability insurance — short-term and long-term coverage. Both replace a portion of your monthly base salary up to a cap during disability.

· Short term disability insurance typically replaces 60% to 70% of base salary. It does not typically include commissions or bonus income. It may pay out for a few months up to one year and usually has a short waiting period before it pays any benefits.

· Long term disability insurance typically replaces 40% to 60% of base salary and benefits end when the disability ends. If the disability continues for many years, the benefits usually end at retirement age as defined by the policy. There is usually a 90-day-to-1-year waiting period before benefits begin.

Disability policies vary in how they define “disabled.” Some policies pay out only if you cannot work any job for which you are qualified. Others pay out if you cannot perform a job in your occupation. Some policies cover partial disability, which means they pay a portion of the benefit if you can work part time. Others pay only if you cannot work at all.

How to get disability insurance

· Employer-sponsored coverage at work. Most employers that offer disability insurance pay some or all of the premiums. Five states — California, Hawaii, New Jersey, New York, and Rhode Island — provide or require employers to provide short-term disability benefits.

· Voluntary disability insurance policies throughout the workplace. Employees buy coverage through the employer’s insurance broker at a group rate when no group policy is offered.

· Purchase through a professional association. Members can buy coverage at group rates.

· Purchase an individual disability insurance plan through an insurance broker or directly from an insurance company. Most individual disability policies sold are for long-term coverage, although some companies also offer short-term policies.

Consider buying a policy if you do not have any or enough disability coverage at work or are self-employed. Employer-sponsored disability insurance usually pays only a portion of your base salary up to a cap. Consider supplementing group coverage if your salary far exceeds the cap, or you depend on bonuses or commissions. An insurer considers other sources of disability insurance to determine how much coverage you can buy, but you usually cannot replace more than 70% of your income from all coverage combined. If you purchase your own policy, you can:

· Customize coverage with extra features including cost-of-living adjustments.

· Choose the insurance company with the best offerings.

· Keep coverage when you change jobs.

· Control the disability insurance. The coverage stays intact as long as you pay for it.

· Collect benefits tax-free if you become disabled. If the employer pays for the coverage, you must pay taxes on the benefits.

The annual price for a long-term disability insurance policy ranges from 1% to 3% of your annual income. A variety of factors affect the cost: your age, health, gender, whether you smoke, your occupation, length of the waiting period, your income, length of benefits, the definition of disability (own occupation vs. any occupation) and extra features. When considering buying long-term disability insurance, think about:

· How much income do you need to replace to maintain your lifestyle if you became disabled and could not work?

· How long could you wait before the disability benefits kicked in?

· How long would you want the benefits to last?

· How broadly would you define "disability"?

Other programs may offer financial help in case of a disability, but with limitations.

· Social Security pays disability benefits. But it can be challenging to qualify for SS disability benefits and the payments are low, and only if you are expected to out of work for more than one year.

· Workers' compensation insurance replaces a portion of income but only if you are disabled because of a work-related injury.

Disability insurance may not be something you want to think about. However, the longer you ignore it, the less protected you are against long-term financial risks due to unexpected illnesses and injuries. If you are not currently working with FPS, we would be happy to talk with you. Questions? We are here to help.

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Best regards,

Janet Rhodes Friedman, CFP®, CDFA®, MBA Janet@PlanWithFPS.com

617-630-4978

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.