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Disability Insurance |
How long could you (and your family) financially survive if you became hurt or sick to the point where you could no longer work? The vast majority of Americans depend exclusively on their regular paycheck to make ends meet. In fact, according to a 2017 CareerBuilder survey, 78% of Americans live paycheck to paycheck. Read More Here
While it’s long been recommended to have 3-6 months worth of expenses readily available in savings , almost no one actually has this to protect them, and that would only be sufficient to cover unexpected expenses (the heat pump dies, a major car repair, etc.) and certainly wouldn’t help all that much in the event of a major illness or injury that prevents you from working for a significant period of time. A long-term disability can be absolutely catastrophic to your financial well-being, having dire consequences to your standard of living and that of your family. Fortunately, there is an insurance product that will protect you from that nightmare.
Disability insurance protects your most important asset: your ability to earn income from your work. If you’re not working, then you’re not earning. Disability insurance steps up in these situations to fill the void so that you can continue to meet your expenses, fund your retirement, pursue your hobbies and spend however you choose.
The two major considerations when purchasing disability insurance are the Benefit Period and the Elimination Period, both of which are determined when submitting the application.
While it’s long been recommended to have 3-6 months worth of expenses readily available in savings , almost no one actually has this to protect them, and that would only be sufficient to cover unexpected expenses (the heat pump dies, a major car repair, etc.) and certainly wouldn’t help all that much in the event of a major illness or injury that prevents you from working for a significant period of time. A long-term disability can be absolutely catastrophic to your financial well-being, having dire consequences to your standard of living and that of your family. Fortunately, there is an insurance product that will protect you from that nightmare.
Disability insurance protects your most important asset: your ability to earn income from your work. If you’re not working, then you’re not earning. Disability insurance steps up in these situations to fill the void so that you can continue to meet your expenses, fund your retirement, pursue your hobbies and spend however you choose.
The two major considerations when purchasing disability insurance are the Benefit Period and the Elimination Period, both of which are determined when submitting the application.
- The Benefit Period determines how long the benefit is paid to you during sickness or injury. For example, benefits can be paid for 2, 5, or 10 years, or until age 65 or 70. The price of the policy will increase as the Benefit Period increases since benefits will be paid for longer.
- The Elimination Period determines how long you will wait until the benefits start to be paid. Example Elimination Periods include 60, 90, 180 and 365 days. The longer the Elimination Period, the less expensive the policy will be. With all disability policies there will be an Elimination Period; therefore it is still important for you to maintain a cash reserve to help you meet expenses until the Elimination Period ends.
Other Key Points about Disability InsuranceDisability insurance will replace up to 60% of your income. If you pay for your disability insurance yourself, generally those benefits will be tax-free. Being tax-free, that is the equivalent of replacing roughly 80-90% of your pre-tax income. However, if your employer pays for your disability insurance, generally those benefits are taxable which therefore lowers your after-tax income.
Most larger companies provide long-term disability to their employees, but that coverage comes with limitations. In addition to most likely being taxable income as mentioned above, most corporate policies are only good for 2 years of “own occupation” coverage. That means that if you’re not able to perform in your normal job during those two years, you will receive disability benefits. However, after 2 years, typical corporate policies will stipulate “any occupation”. “Any occupation” means that, after 2 years of being on disability, if you’re able to perform any job – even if it’s totally unrelated to your education and background – then they will no longer pay you a disability benefit, regardless if that “any occupation” pays anywhere near your pre-disability income. For example, suppose you’re an IT Manager making $125,000. One day you get either hurt or sick and you’re no longer able to perform those duties, but your company has provided you with long-term disability insurance. You will receive disability benefits, but after 2 years you may still not be able to resume your previous occupation but if you’re able to perform ANY job, be a Walmart greeter or a call center representative or what have you, they will no longer pay you a disability benefit. Clearly, you’re not going to be able to make the same income as a Walmart greeter that you would have as an IT Manager. For that reason, those covered by their employer’s policy should still consider purchasing a disability policy on their own that is for “same occupation”.
Most larger companies provide long-term disability to their employees, but that coverage comes with limitations. In addition to most likely being taxable income as mentioned above, most corporate policies are only good for 2 years of “own occupation” coverage. That means that if you’re not able to perform in your normal job during those two years, you will receive disability benefits. However, after 2 years, typical corporate policies will stipulate “any occupation”. “Any occupation” means that, after 2 years of being on disability, if you’re able to perform any job – even if it’s totally unrelated to your education and background – then they will no longer pay you a disability benefit, regardless if that “any occupation” pays anywhere near your pre-disability income. For example, suppose you’re an IT Manager making $125,000. One day you get either hurt or sick and you’re no longer able to perform those duties, but your company has provided you with long-term disability insurance. You will receive disability benefits, but after 2 years you may still not be able to resume your previous occupation but if you’re able to perform ANY job, be a Walmart greeter or a call center representative or what have you, they will no longer pay you a disability benefit. Clearly, you’re not going to be able to make the same income as a Walmart greeter that you would have as an IT Manager. For that reason, those covered by their employer’s policy should still consider purchasing a disability policy on their own that is for “same occupation”.
