What would you say if I told you that you have a 25% chance of becoming disabled before you retire? According to the Social Security Administration, that’s exactly what could happen, as over 1 in 4 of today’s 20-year olds will experience some form of disability before age 67. So what does that mean for you, who is likely reading this as a 20, 30, or 40-something? It means that it’s time to educate yourself on the risks that are out there and what they could translate to if you don’t have the right protection in place. Keep in mind that your ability to earn an income is likely your most valuable asset. If you’re like the majority of Americans, you work hard for your income — whether it’s operating your own business or working as an employee of an amazing company. Your income comes from your talents, skills, education, and your ability to actually do the job. So what happens if you can’t actually perform your work? What would that do to your lifestyle, your family, and your goals? What happens if you’re no longer able to actually earn that income? That’s where disability insurance comes into play. For many Americans (millennials especially) this is an overlooked insurance. People think, “it won’t happen to me,” or perceive disability as something that happens only to the elderly. In reality, long-term disabilities can manifest in the form of pregnancy complications, cancers, mental disorders, injuries and poisonings and more. So what do you need to know? Here are the facts: According to the Council for Disability Awareness, the average long-term disability claim lasts 34.6 months (that’s almost 3 years!). That means your average emergency fund likely won’t protect you for the full term.
What is Disability Insurance?
Disability Insurance is a plan that provides for periodic payments of benefits when a disabled insured is unable to work. The insurance is designed to replace anywhere from 45% to 66 and 2/3% of your gross income should illness keep you from earning an income in your occupation. It encompasses paid sick leave, short-term disability benefits (STD), and long-term disability benefits (LTD).
Short-Term Disability (STD)
Short-term disability coverage kicks in if you’re out of work for a brief period, typically ranging from a few weeks to up to 90 days. Elimination periods are usually about a week or so before the benefits begin (income can be supplemented with sick or vacation time during this period). The policy pays up to 66 and 2/3% of your income until the benefits run out or your long-term policy kicks in.
Long-term disability policies pay for an extended period of time, typically up until you return to work, max out the policy for a certain number of years, or reach retirement age. Elimination periods usually range around a few months, but can be longer and benefits kick in after your short-term benefits run out (if you have such a policy), paying up to 66 and 2/3% of your income.
What if You’re Self-Employed or Don’t Have Employer Coverage?
If you’ve read through your employee benefits (which I recommend you do), and you don’t have income protection or if you’re an entrepreneur and needing to obtain a private policy on your own, ensure you’re looking at your earnings over the two most recent years when applying for coverage. Shop around to different carriers and don’t settle on the first product or provider you see. Working with a broker instead of an agent will give you access to a bigger variety of companies, but ultimately you’ll want to talk to a CFP® before purchasing a policy of your own in order to ensure you’re getting the right coverage and protection.
Where to Start and Questions to Ask:
When obtaining or reviewing an income protection policy, look for and ask the following:
- Does your employer provide coverage? If so, is it for short or long-term and what are the benefits and elimination periods?
- Whether a group policy or a privately owned policy, ensure you read the fine print and understand maximum benefits, terms, and definitions.
- Is it “any” or “own” occupation coverage? (Meaning does it pay if you can’t perform your own occupation or any job that meets your education and skill level?)
- How much of your income will ultimately be replaced and for how long?
- What is the elimination period (i.e. how long until the policy kicks in)?
- How much should you have stashed away to cushion any elimination periods (i.e. will you save and self insure for any short-term disabilities)?
- Will the benefits be pre-tax or post-tax? (This comes into play when participating in employer group policies. If you’re paying premiums pre-tax or the company pays for you, your benefits will be taxable.)
- Check out this Disability Security Plan from the Council for Disability Awareness.
- Keep in mind that you can’t replace 100% of your income with disability insurance and the goal is to provide protection, but also to give you an incentive to return to work.
So what do you do first? Start by working to build up your emergency fund, reviewing your employee benefits and coverage (or reaching out to your HR department), and reaching out to a CERTIFIED FINANCIAL PLANNER™ to determine your insurance and coverage needs.