Tag: Disability Insurance

What If You Got Sick or Injured? 3 Reasons Why You May Need Disability Insurance

Written by support@seostats.com on October 9, 2023. Posted in Financial Planning, Insurance, Saving.

Here’s a sobering statistic. According to the Social Security Administration, a 20-year-old has a more than one-in-four chance of becoming disabled before reaching retirement. Surprising, huh? Unfortunately, facing a disability and loss of income is more common than you might realize.

If you were sick and injured, and unable to work normally, how would you cover your existing income? Most people don’t have enough in savings to live off of, especially if they’re young and retirement is still far off. You might consider Security Disability Insurance (SSDI) from the government. But it’s difficult to qualify for and the payouts are modest at best (an average of $1,234 per month).

Many employers offer short-term disability insurance, but if you’re unable to work for a long period of time or permanently that won’t help you. Also, if you’re self-employed or a professional with specialized training or education, such as a lawyer, you’ll need to purchase coverage on your own.

The truth is most of us have a need for disability insurance. So, let’s talk about why this type of coverage is valuable and what type of plan may be right for you.

What Disability Insurance Covers—and What it Doesn’t Cover

The goal of disability insurance, often called disability income insurance, is to cover a loss of income if you experience a sickness or injury and are unable to work. We believe you should consider purchasing enough disability insurance to cover nearly half of your current income, and perhaps more to avoid dipping into your retirement savings to cover college expenses and other costs. With the right amount of coverage, you can continue to live comfortably even if you face a long-term disability rendering you unable to work.

Just imagine if you were suddenly diagnosed with cancer, multiple sclerosis, chronic migraines, severe arthritis, or even debilitating depression. Most likely, you wouldn’t be able to work in your normal capacity. These types of severe health conditions can happen to anyone at any time. That’s why disability insurance is so important.

Keep in mind, disability insurance is designed to cover a loss of income. It does not cover:

Medical bills related to your disability
Long-term care services
Benefits over age 65, when many people are unable to perform work as usual

Disability insurance is different than workers’ compensation in that it can cover your income for a disability suffered outside of work. Workers’ compensation, however, can cover medical bills, a loss of income, and even job training if you suffer a work-related injury or illness.

Two Types of Disability Insurance Plans

Short-term disability plans

Fortunately, most disabilities are temporary, and many workers go back to work within a year. A short-term disability insurance policy can replace your income for a brief period of time, so you can recuperate from an injury or illness, and then get back to work.

Usually, you can get a short-term disability policy through your employer’s benefits package. These plans are either mandatory and paid for by your employer, or voluntary and you pick up the tab. Most short-term disability plans offer payouts for three to six months.

Long-term disability plans

For disabilities that are more acute, severe, longer lasting, or even permanent, you’ll need long-term disability insurance protection. Long-term plans are designed to offer benefits for a year or longer. Unlike short-term disability insurance that most people receive through their employer, most people purchase long-term disability insurance on their own.

It often makes the most sense for business owners and high-income professionals to purchase long-term disability insurance. In general, business owners need to secure their own income protection if they can no longer work. High-income earners (those who earn more than $250k per year) should buy just enough insurance to cover their expenses and minimize the impact on their lifestyle.

As you shop for a long-term disability policy, you’ll see the terms, “own-occupation” and “any-occupation” benefits. Here’s the difference. If you purchase an “own-occupation” policy, you’ll receive a benefit if you can no longer perform your regular occupation. If you purchase an “any-occupation” policy, you receive a benefit that covers your loss of income, knowing you can succeed at another type of job.

For example, a debilitating foot injury can prevent you from performing tasks that require mobility, but you still may be able to succeed at a desk job in the same company with appropriate training. In these cases, an any-occupation policy is enough because you can return to work without a significant loss of income. In general, “own-occupation” policies are much more expensive than “any-occupation” policies.

3 Reasons Why You May Want Your Own Disability Insurance Coverage

Reason #1: Your employer doesn’t offer enough coverage to protect you.

Most employees can rely on their company’s short-term disability insurance if they’re injured or sustain an incapacitating health emergency, such as a stroke or heart attack. However, these corporate plans usually aren’t very generous. They typically replace up to 60% of the employee’s salary for about three to six months, and the employee will owe taxes on the payments. Another problem is that the policies only cover employees. If you need to quit your job due to a severe disability, you’ll forfeit your benefit.

But, if you have your own disability insurance in place, you’ll still receive benefits on top of your employer’s coverage. Plus, if you leave your job, you’ll have income protection.

Reason #2: You’re a business owner who needs to secure your own coverage.

Disability insurance is crucial for self-employed workers because it’s a lifeline for obtaining income if you can no longer operate your business. It can also help you pay your monthly business expenses while you’re taking a break to recover. If you’re a business owner, you can choose between short-term or long-term disability insurance. As a way to minimize costs, you may want to purchase a long-term policy and then use emergency funds to cover your expenses for three to six months (when you would be left uncovered).

Reason #3: You’re a high earner and will experience a significant loss of income if you can’t work.

High-earning professionals with specialized skills and training, such as physicians, dentists, lawyers, and independent business owners, require more comprehensive disability insurance. For example, a surgeon who develops arthritis and cannot work will suffer a significant loss of income, even though they may be able to do other types of work.

If you fall into one of these categories, you may need to purchase a more costly disability insurance policy that can cover a loss of income in your profession (also known as own-occupation benefits). This means, you’ll receive a payout for your line of work, assuming you can no longer do your job or any other similar job.

The Bottom Line

Disability insurance can be expensive, depending on your benefit amount and period, policy features and options, plus other factors such as age and health. But for business owners, those in specialized professions, or high earners with a significant amount of income to protect, making a disability policy part of your financial planning may make sense. We recommend doing your due diligence and making sure you consider disability insurance as you map out a financial plan.

Lake Road Advisors, a Fee-Only, independent financial planning firm with offices in Corning, NY, Ithaca, NY and Portland, OR works with clients virtually all across the country. Paul Sydlansky, the founder of Lake Road Advisors LLC, has worked in the financial services industry for 20+ years. Prior to founding Lake Road Advisors, Paul worked at Morgan Stanley in Manhattan for 13 years. While at Morgan Stanley, Paul was a senior-level manager within the Institutional Equities Department. In 2018 he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network.

Do I Need Disability Insurance?

Written by support@seostats.com on November 18, 2019. Posted in Insurance.

Previously, I’ve written about how to determine if you need life insurance or not (and if you do, how much is enough). Another common consideration in the realm of protection planning is disability insurance.

Like life insurance, you may already have some amount of coverage for disability through your employer. If it’s offered as a benefit, you can join your company’s group plan to receive short-term, long-term, or both types of disability insurance for a much lower cost than if you went out to get your own private policy.

But where you might only need life insurance if someone financially depends on you and would suffer a hardship if you passed away, almost everyone with a job needs some form and amount of disability insurance.

Here’s why.

Disability Insurance Can Help Protect Your Most Important Asset

Where life insurance protects people you might leave behind that depend on your income — like a spouse or minor-aged children — disability insurance is designed to protect you from a loss of income.

Your ability to work, earn money, and then leverage those earnings into savings or investments is one of your most valuable assets throughout most of your life. It’s by working and earning an income that most people are able to save for major goals like buying a house or funding an eventual retirement.

Without your income, how would you save money for these important financial needs? That’s where disability insurance comes in, and why it’s so important to have.

And before you think “that’s not something I have to worry about,” consider that 1 in 4 adults aged 20 years old right now will experience a disability before they reach full retirement age of 67. That means you have a 25% chance of becoming disabled in some way.

If you have a job right now, you most likely need some amount of disability insurance to protect against a permanent loss of income before you’ve saved and invested enough to live off a nest egg instead of a paycheck.

The Basic Rundown on How Disability Insurance Works

If you experience a disability that prevents you from continuing to work and have disability insurance, you can file a claim and your policy will pay out a benefit equal to some percentage of your previous income.

Disability insurance doesn’t require you to experience a worst-case scenario before it will kick in. You don’t need to lose a limb or be unable to function in any area of life for benefits to pay out; depending on the policy you have, you could be covered for things ranging from temporary physical ailments to mental illnesses to truly debilitating injuries.

There are two main types of disability insurance coverage: short-term and long-term. Short-term disability insurance tends to cover more of your income if you need to use it (usually around 60 to 70% of your income), but usually only pays out for a few months up to one year… even if you’re still disabled at the end of the time period.

Long-term disability, on the other hand, will replace less of your income (maybe 40 to 60%). But it will also provide coverage until your disability ends or until you reach normal retirement age.

Both types of policies come with waiting periods. With short-term disability policies, you may need to wait around two weeks for your benefits to start paying out. Long-term disability insurance policies usually have a longer waiting or elimination period of about 90 days before paying benefits.

To account for these waiting periods, it’s important that you can self-ensure throughout the period of time you don’t receive benefits. The common rule of thumb for emergency reserves is having 3 to 6 months’ worth of expenses set aside in cash, which you could use until a disability policy kicked in to cover you.

How to Get the Disability Insurance Coverage You Need

Just about anyone with a job who relies on their paycheck as the source for paying expenses and funding savings goals needs some kind of disability insurance policy in place.

The good news is, you might already have coverage through your employer. Short-term and long-term disability insurance policies are commonly-provided company benefits that you should take advantage of if you can.

You can talk to your HR department to determine what coverage you already have. During open enrollment periods, you can make changes and updates to your policies and coverage amounts (or opt in if you weren’t previously using the benefit).

Once you determine what you might already have from an employer, consider talking with a financial planner to see if your existing coverage is sufficient or not. Depending on your needs, tolerance for risk, progress toward financial goals and financial independence, you may not need anything more than what you can access through your employer.

But you may also find you have some gaps in coverage. In that case, a good planner can show you how much additional coverage you might need to fill those gaps (without buying a bigger policy than necessary to help you save on premiums).

They can also suggest the best places to go to get disability insurance if you need it by evaluating your options. That could include your employer if you’re allowed to buy more coverage voluntarily or a professional organization you’re a part of. Planners may also be able to provide you with a referral to a broker they know and trust.