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By Erik Mizell, CFP®, CLU®, RICP®

What if…

You were the proud owner of an ATM machine that someone else restocked every two weeks? The only catch is that you simply have to keep the electricity on. Do you think that you might do everything in your power (pun intended), to make sure that happened?

What if that ATM is actually you, and your ability to continue working is what restocks it?

For example, a 30 year old who earns a $125k annual salary and eventually retires at 65 will earn $4,375,000 over their working years (assuming that they never receive a raise).  Isn’t that worth insuring?

According to the Council for Disability Awareness, around 25% of today’s 20-year-olds will become disabled before reaching retirement age.  The impact on future earnings could be a major hurdle that significantly alters the ability to reach financial goals.  While disabilities can result from various causes, including accidents, illnesses, and chronic conditions, some of the leading causes of long-term disability claims include musculoskeletal disorders, cancer, mental health conditions, and cardiovascular diseases.

The length of disability can vary widely. While some disabilities may be temporary, others can last for years or even be permanent. The Social Security Administration (“SSA”) reports that over a quarter of 20-year-olds will experience a disability that lasts for at least one year before they reach retirement age.

Despite the risk of disability, many individuals lack adequate insurance coverage. According to the SSA, only around 35% of private sector workers have access to long-term disability insurance through their employers.  A typical coverage level from an employer provided plan may only insure ~60% of pre-disability earnings.  If that insurance benefit is fully paid for by the employer, the benefit is then taxed as income.  The result is even less income replacement for the employee. For most benefit plans, if someone is permanently disabled this benefit will only last until age 65.  After that, the employee could be limited to their Social Security payments for future income streams throughout retirement.

Long-term disability insurance is an essential financial tool, but there are several common misconceptions surrounding it:

• It’s the Same as Workers’ Compensation.

Long-term disability insurance is often confused with workers’ compensation, which covers injuries or illnesses directly related to your job. Long-term disability insurance, however, covers disabilities that occur both on and off the job.

• It’s Only for Workplace Accidents.
  Many people believe that long-term disability insurance is only necessary if they work in high-risk environments. In reality, disabilities can result from numerous causes that may not be related to work.
• Social Security Disability Benefits are enough.
  Some individuals assume that government disability benefits will adequately cover their needs. However, Social Security Disability Insurance (SSDI) benefits are often modest and may not be sufficient to maintain one’s standard of living.
• It’s only for severe disabilities.
  People often think that they need to be completely incapacitated to qualify for long-term disability benefits. In reality, policies vary, but many cover partial disabilities that prevent individuals from performing their usual job duties.
• Employer-Provided Coverage Is Sufficient.
  While some employers offer long-term disability insurance as part of their benefits package, the coverage might be limited. Additionally, if you leave the job, you may lose this coverage. It’s wise to supplement employer-provided insurance with a personal policy to ensure comprehensive protection.
• It’s Too Expensive.
  You may believe that long-term disability insurance is too costly. However, the cost of being without coverage in the event of a long-term disability can be far greater. Plus, there are various policy options available to fit different budgets.
• It covers all lost income.
  Long-term disability insurance typically replaces only a portion of your income, often around 50-70%. While this helps maintain financial stability, it may not cover all expenses. Understanding the coverage limits is essential for financial planning.

Recognizing that everyone has a unique situation, this area of financial planning is so often overlooked in favor of the more exciting areas of wealth creation.  However, at the end of the day, your income is what drives you towards the exciting stuff, and we should do everything we can to make sure that the ATM machine (you) continues to stay powered up!

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