Chances are that at some point in your life you or someone you know have had an accident that impacts their ability to work. Whether you fall off a ladder or find out that you will be welcoming a baby into your life, happy or sad, life events can dictate our ability to provide for ourselves and our loved ones.
May is Disability Insurance Awareness Month. Most people don’t realize it, but a disability can be far more damaging to your family’s wealth than death. With that in mind, it’s the perfect time to consider your disability needs.
There are two types of disability insurance, short-term and long-term. Both are critical to a sound, well-rounded financial plan. And both are designed to protect your number one asset – your ability to earn an income.
Disability insurance is used as income replacement in times of injury, illness, or pregnancy. It typically covers 60-70% of your gross income. One important thing to know about your disability insurance is taxation. If you pay your premiums on an after-tax basis, the income benefits you receive will be tax-free. If you pay your premiums with pre-tax money or if your employer pays your premiums, your income benefits will be taxable. The taxation of your income benefits is important when analyzing if you have enough coverage. If your benefit is taxed, you may need a bigger benefit to cover expected taxes.
One thing to keep in mind is the duration of your benefits. Short-term disability insurance coverage can range from a few weeks to a few months, while long-term disability benefits can last until age 65. To make sure you are adequately covered, it is important that your short-term benefits cover your income needs until your long-term benefits start.
Before collecting your disability benefits, you must first go through an elimination period. Think of the elimination period like your home and auto insurance deductible. An elimination period is the period of time you must wait after becoming disabled before you are eligible to receive benefits. For short-term disability, an elimination period can be as short as one week or up to one month or longer. For long-term disability, an elimination period can be as short as 30 days or up to one year. The length of your elimination period will affect the cost of your insurance premiums.
Something that may come as a surprise to you is that there are two definitions for being disabled. The first is “own-occupation,” meaning you are considered disabled if you cannot perform the duties of your specific job. The second definition of disabled is “any-occupation.” Under this definition, you are only considered disabled if you cannot perform the duties of any job for which you are suitable based on your education, experience, and age.
If you believe you need coverage or more coverage, one of the first places to look is your workplace. Chances are your employer already offers disability insurance coverage as a benefit. If not or if the employer plan is inadequate, you can buy a policy on the open market just like life insurance or car insurance.
One last thing to consider: Insurance companies will often not let you replace 100% of your income with disability insurance. So even though you may feel like additional coverage is warranted, you may not be able to buy more coverage.
But having slightly less coverage than you like is far better than no coverage at all.
This article is for educational purposes only.
Justin Lueger is President of Invisor Financial LLC, a registered investor adviser firm in the State of Kansas. All opinions expressed are his own and should not be viewed as individual advice. He can be reached at justin.lueger@invisorgroup.com.