DISABILITY INSURANCE: A FINANCIAL SAFETY NET FOR INCOME PROTECTION

In a world where anything can happen, your capacity to earn a living is your greatest asset. And yet, most individuals ignore the possibility of disability—resulting from an accident, sickness, or chronic illness. Disability insurance will cover a part of your income in case you are incapacitated and unable to work, providing you with the security you need when times are tough.

As opposed to health insurance (pays for doctor’s bills) or life insurance (covers dependents upon your death), disability insurance offers financial assistance for the long term while you are unable to work. Let’s consider why it is necessary, the types available, and how to get the right coverage.

WHY DISABILITY INSURANCE IS SO IMPORTANT?

1. Risk of Disability is Soaring

• According to the Social Security Administration (SSA), 1 in every 4 employees will suffer from a disability before they retire.
• Disabilities are not only caused by accidents—sicknesses like cancer, heart disease, and serious back trouble are common causes.

2. Employer Coverage Could Be Inadequate

• Many employers provide short-term disability (STD) insurance, but benefits are often only 3–6 months.
• Long-term disability (LTD) insurance is not so prevalent and covers only 40–60% of your salary.
• Self-employed workers and contract workers generally have no coverage.

3. Insures Against Financial Devastation

If you don’t have disability insurance, you might need to:

• Drain savings or retirement funds.
• Rely on family support or government benefits (which are often limited).
• Default on loans, mortgages, or credit card payments.

TYPES OF DISABILITY INSURANCE

1. Short-Term Disability (STD) Insurance

• Covers 3–6 months of income loss.
• Typically replaces 60–70% of your salary.
• Ideal for temporary disabilities (e.g., recovery from surgery).

2. Long-Term Disability (LTD) Insurance

• Kicks in after 3–6 months and can last years or until retirement.
• Replaces 50–70% of pre-disability income.
• Best for serious illnesses (e.g., chronic illness, permanent injury).

3. Social Security Disability Insurance (SSDI)

• A government-funded program for extreme, long-term disability.
• Tough eligibility standards—must establish inability to work at any occupation.
• Payments are moderate (average: $1,300/month in 2023).

4. Own-Occupation vs. Any-Occupation Coverage

• Own-Occupation: Pays if you can’t work at your particular profession (e.g., surgeon with hand injury).
• Any-Occupation: Pays only if you can’t work any job (less desirable).

KEY FEATURES TO CONSIDER IN A DISABILITY POLICY

1. Definition of Disability

• Strict policies may require you to be unable to do any type of job.
• Better policies compensate if you can’t work in your own occupation.

2. Benefit Period

• Short-term: Up to 2 years.
• Long-term: 5 years, 10 years, or until retirement age (65+).

3. Elimination Period (Waiting Period)

• The interval between disability inception and benefit payment (e.g., 30, 60, or 90 days).
• Longer waiting period = lower premiums.

4. Non-Cancelable vs. Guaranteed Renewable

• Non-cancelable: Insurer cannot adjust premiums or cancel coverage.
• Guaranteed renewable: Insurer can raise premiums but cannot cancel.

5. Riders (Optional Add-Ons)

• Cost-of-Living Adjustment (COLA): Boosts benefits with inflation.
• Future Increase Option: Allows you to increase coverage as income increases.
• Partial Disability Rider: Pays out if you can only work part-time.

HOW MUCH DISABILITY INSURANCE DO YOU NEED?

• Shoot for 60–70% of your gross income.
• Factor in current coverage (employer plans, SSDI).
• Take into account monthly costs (mortgage, bills, medical expenses).

TAX CONSEQUENCES OF DISABILITY INSURANCE

• Employer-paid premiums: Benefits are taxable.
• Self-paid premiums: Benefits are tax-free.
• Self-employed can deduct premiums as a business expense.

FINAL THOUGHTS: IS IT WORTH IT?

If you live on your earnings or use your earnings to take care of your family, you need disability insurance. No one hopes to get disabled, but the cost of not being ready can be dire.

Next Steps:

• Evaluate your current protection (employer, government).
• Shop for private policies for increased benefits.
• Talk to a financial planner to customize protection for your situation.

By getting disability insurance, you’re not only insuring your income—you’re insuring your family and future.

Consider Reading – WHY TO HAVE HEALTH INSURANCE AT A YOUNG AGE