A person’s ability to earn an income is one of their most valuable assets, yet it is frequently under protected. Disability insurance provides income replacement in the event you are unable to work due to illness or injury and can help cover everyday expenses if your paycheck were to stop. A long-term disability can derail even the strongest financial plan, which is why it is crucial to understand your coverage. Many disabilities are caused by illness, as opposed to accidents, which is a common misconception that causes many people to underestimate their risk and delay getting proper coverage. Most people recognize this concept from open enrollment through work, but employer coverage is often limited or may not fully replace income. Since this concept is key to building a durable financial plan, we want our clients to be well-versed in it! So where to start?
There are several key elements to disability insurance policies. The benefit amount, or amount of coverage, is normally stated in monthly amounts and typically replaces up to 50–70% of income. The elimination period is the waiting period before benefits begin, which can be anywhere from 30, 90, or 180 days. The benefit duration is the time that payments last, which can also range anywhere from 2 years, 5 years, or until retirement age. There are also various definitions of disability coverage, such as “own occupation” or “any occupation”. Under an own-occupation policy, you are considered disabled if you cannot do your specific job, even if you could still work in some other job. Under an any-occupation policy, you are considered disabled only if you cannot do any job at all that fits your skills, experience, or education.
There are also various ways to obtain disability coverage, either through an employer-sponsored group plan or an individual policy. Both provide valuable benefits, but there are some important distinctions to be aware of. Employer (group) policies are often offered at a lower cost but may be less flexible and benefits may be taxable when they are received. Individual policies require underwriting, but are portable, customizable, and can offer stronger protection when paired with an employer-sponsored group policy. There are also government programs like Social Security Disability Insurance (SSDI) to be kept into consideration, but programs like these may be limited. These may pay lower benefits and can take a longer time to approve, so are often not designed to fully replace your income.
The question then becomes how should I structure my coverage? Every situation is different, but typically a layered approach is a good strategy. Using group coverage as a base and building upon it with an individual policy to increase your total benefit and ensure that some amount of coverage will be portable can increase the strength of your overall financial plan. It is important to review your coverage regularly, and some key instances are salary increases, job or career changes, and major life events such as marriage, new children, or a new mortgage. There are many reasons why disability coverage is important, but remembering that it protects your income, keeps your financial plan intact, prevents long-term financial setbacks, and provides stability during uncertain and stressful times, can help as you navigate what is best for you!
Some Things to Consider!
- Do you know how much of your income is covered?
- How long would your emergency fund last without a paycheck?
- Is your coverage tied to your current employer?
The World is Your Oyster