What is your most important asset? Is it your home? Your car? It’s you and your own ability to work. For most people we don’t think twice about acquiring insurance to cover those other assets, but have you covered your future paycheck?
May is Disability Insurance Awareness month and we couldn’t pass up the opportunity to shine a light on this often-over-looked type of insurance. As mentioned, before we are all familiar with homeowners, auto, life, and medical insurance, aside from those well-known commercials with a duck chasing around the recently injured person and their friend shouting in a voice even our kids can recognize, when was the last time you talked about disability insurance?
Disability insurance protects your income if you become sick or injured, providing a way for you to continue paying your bills and protect future earnings. More than a quarter of the people working today will have some type of disability that prevents them from working at some point in their life, and yet 51 million working Americans don’t have disability coverage.
Your financial responsibilities don’t go away if you are unable to work. When looking for a disability plan consider the MUG costs, your Mortgage, Utilities, and Groceries. Using this simple rule-of-thumb, at the very least, the policy amount should be large enough to cover these items.
Many employers provide some sort of disability benefit. Always take advantage of this when you can, however, an employer sponsored plan will not always provide you with lasting coverage, nor can you take it with you if you get a different job. Having your own personal coverage will insure you have what you need regardless of where you work. A personally owned policy is the most secure way to make sure you and your family are covered to some level of income, (ie,. The MUG scenario)
It is very important to understand the details of your coverage, whether through your employment or an individual policy. You need to know how your policy defines “disability”. All companies have a different policy; a new employer might have a different definition within their policy. Social Security defines it as total disability - meaning you can’t work AT ALL, this is a very narrow definition and will affect whether you can receive a benefit if you become disabled.
For private policies the definition ranges from not being able to work at all to a broader view of if you can’t perform your specific occupation. For example, a surgeon that is no longer able to use his hands has to transition to a teaching position - probably making less than he would have as a practicing surgeon. The right disability policy would make up some of the difference between the two salaries.
You also need to know which definition triggers a payment of benefit, as well as if it covers mental disability as well as physical, and if physical coverage includes both injury and illness.
When your employer provides disability, and they are paying the premiums for their employees it becomes a tax-deductible business expense. This makes you responsible for paying taxes on the benefit received. However, if you paid the premiums with after-tax dollars, you may receive the benefits income tax free. Which means, when you receive benefits from your personal disability insurance policy, for tax reporting purposes, it’s not actually classified as income.
There maybe an elimination period - the length of time between your disability and the payment of benefits. Shorter waiting periods carry a higher premium than the longer elimination periods. This is a prime reason to have an emergency fund. You should plan your emergency fund to coincide with your elimination period, so you are able to cover your “MUG” expenses without going into debt and causing more stress.
You also need to know the length of duration for your policy. The ideal would be a policy that pays until age 65, but for some people that is a long way off and can make for a very expensive policy. Many policies limit the length of coverage to five years. You will need to have a strategy for permanent disability in order to provide income after the five-year period. It’s a good idea to shop around for the policy that works best for you.
Both long term and short-term disability insurance will protect your income and provide a “paycheck” on a regular basis. Each will have a waiting period. The difference comes in the percentage of your overall income that you will receive. Short term coverage will typically cover 60%-70% of your salary for a set amount of time, typically, less than one year. whereas long term coverage will usually provide 40%-60%, for an extended period, either a set number of years or until age 65.
You work hard to afford your everyday living expenses, but life happens, and you may find yourself in a situation you didn’t plan on, perhaps an accident or an illness. May is a good time review this coverage and update as needed.