If you’re like most people who earn an income, everything you own today, including your home, car, boat, and even the food on your table, depends on your ability to bring home your paycheck. It’s what makes your lifestyle possible. When you think about it, your ability to earn money, both for yourself and your heirs, is your most important asset.
What would happen if this asset were compromised? If you were unable to earn your expected income because you got sick or had an accident? While most people have health insurance to pay their medical bills, car insurance for their car, homeowner’s insurance for their home—the list goes on—too many people overlook insuring the one thing that pays for everything else: their income.
This is a subject with which I have personal experience. Years ago while crossing the street I was hit by a car. My leg was broken in three places and I was almost totally disabled for eight months. I didn’t have disability insurance then; I had always figured that, even if I were physically disabled, I would still be able to talk with my clients and conduct my business by telephone, so I could carry on pretty much as usual. But it was very difficult to conduct “business as usual” with my injuries, and I bought disability insurance for myself as soon as I was able to do so. Then I wouldn’t have to worry about working and paying the bills for my home and family if I were to become disabled again.
The accident was a scary experience, and one that I had no idea was coming. One moment everything was fine and the next moment I was in the hospital. My life changed in an instant. Fortunately I recovered, but it taught me a lesson: Be prepared!
Protecting your income with disability insurance would be a very wise decision. Disability insurance can help replace a major portion of your income when you are sick or injured and unable to work. Some people think of it as “paycheck protection.” Since a mortgage payment is often a family’s most significant monthly expense, others view it as a way to protect their home.
The risk is real—statistics say that that if you’re at the age forty, prior to reaching age sixty-five you have a 43% chance of becoming disabled for ninety days or more.
Doing the Math
When considering how much disability insurance you might need, the first thing to do is assess your income sources and your liabilities. As you evaluate the financial consequences of disability, you should carefully consider sources of available funds:
Your savings. If you have saved ten percent of your income each year, one year of total disability could wipe out ten years of savings. Could you afford that?
Employer coverage. If you became disabled, do you know how much your employer or business would continue to pay you, and for how long?
Working spouse or partner. If you have a spouse or partner who works—or could work—could he or she earn enough to support the household while possibly also being your caretaker?
Social Security. If you become disabled, the federal government won’t immediately come to your rescue. As of this writing, you cannot collect benefits until the end of the fifth full calendar month of total disability, and then only if it is expected to last twelve months or more. Could you wait six months for payment? What would you do if your disability doesn’t meet federal requirements?
Selling investments and assets. Will selling stocks or other assets under forced conditions bring a true value? What will their value be at the time you are disabled?
Obtaining a loan. Without an income, will you be able to borrow money?
Most financial planners and insurance agents have easy-to-use needs assessment calculators to help you determine how much coverage you need. You simply plug in the numbers and then decide how much coverage you need and for how long.
Short Term and Long Term
Most insurance companies offer short-term and long-term disability insurance. Both types of policies are designed to pay you a monthly benefit if you are unable to work due to a disabling accident or sickness. The definition of “disability” and the conditions under which you can collect benefits will differ depending on the policy and state.
Here are the typical features of each.
Short Term Disability (STD). This type of insurance policy is useful for major but relatively brief disabilities such as those suffered from an accident or a non-terminal sickness. They pay benefits after a pre-determined “elimination period” has been met. (This is the number of calendar days after a disabling injury or onset of illness before your disability insurance policy begins to pay benefits). A short-term policy may be right for you if want immediate coverage from the first day of your disability, you only need coverage until your employer-provided disability insurance would begin paying benefits, and you are willing to accept a shorter benefit period to keep the premium as low as possible. You can customize this policy by selecting the elimination period, benefit period, and optional riders that would best meet your needs. You can buy additional options, such as lump-sum benefits for certain critical illnesses, a lump sum payment to your beneficiaries if you die while covered, payments if you’re hospitalized, and many more.
Long Term Disability (LTD). As the name implies, these insurance policies provide comprehensive long-term benefits that will cover you in the event of accident and sickness, with a benefit period ranging from two years or until retirement age. Because each state has its own regulations governing the length and availability of long-term (and short-term) disability insurance, it is important to talk with a licensed insurance agent in your area to determine possible time frames. Long-term disability insurance may be right for you if you have resources that could cover your living expenses for the first few months of a disability, you want long-term benefits that would cover disability from an accident or sickness, or you’re interested in protection that is portable throughout several years of your career, even up to retirement age.
Employer-Provided Disability Income Insurance
Many employers offer disability income insurance as part of their employee benefits program. If your employer pays the premium, you will pay tax on any disability benefits you receive. Even if you have employer-provided disability insurance, you may want to supplement it with an individual policy.
Disability Insurance for Business Owners
While a personal disability insurance policy can protect you if you cannot work, if you own a business it will likely not provide a large enough benefit to keep your business solvent as well. Most insurance companies offer business overhead expense (BOE) insurance to help small business owners maintain their business in the event of sickness or disability.
Social Security Disability Benefits
The Social Security and Supplemental Security Income disability programs are the largest of several federal programs that provide assistance to people with disabilities. While these two programs are different in many ways, both are administered by the Social Security Administration, and only individuals who have a disability and meet medical criteria may qualify for benefits under either program.
Social Security Disability Insurance pays benefits to you and certain members of your family if you are “insured,” meaning that you worked long enough and paid Social Security taxes.
Supplemental Security Income pays benefits based on financial need.
No matter your circumstances, it’s a smart move to investigate disability insurance.
You never know when an accident might happen. You can’t eliminate risk by hiding at home, which is why it pays to be prudent and take the necessary steps to plan for the unexpected. Accidents and illnesses happen to everyone at some time in their life; the key is to not let a negative incident wipe out your finances.