Disability Insurance

Do you need disability insurance?

Do you need disability insurance?  Would you want to protect your largest asset?  If so, then I would say yes, you need disability insurance.  Your largest asset during your working years is your ability to make money.  According to the Council for Disability Awareness1, more than one in four of today’s 20-year old’s will be out of work for at least a year due to a disability before they reach full retirement age.  That is an alarming statistic.   

There are different types of disabilities as well—long term and short term.  Short term disabilities are usually temporary and last 3-6 months.  Long term disability usually starts after the short-term disability period is over. 

Where do you get disability insurance?

  • Social Security Disability Insurance only pays for total disability, the waiting period is 5 months, and the disability must be expected to last 12 months or longer2.   If you are approved for disability insurance through Social Security, the average monthly benefit for April 2021 was $1,280 for disabled workers3.  
  • Disability Insurance through work.  This is considered a Group Policy and when you leave your job, you cannot take it with you.  The nice thing about group policies is that you typically do not have to prove insurability and the cost is lower with it being a group plan.  Often your employer pays a portion of the coverage as well.
  • Private Insurance—this is purchasing your own policy and you can choose different features such as partial disability, own occupation, future benefit increase options, etc.  

How much Disability Insurance can you get?

  • 60% of your earnings is usually the limit.  There are a couple of reasons for this.  First, you do not want to incentivize people to not work.  Also, you will not be paying payroll taxes on these earnings and will likely be in a lower income tax bracket while collecting as well so you do not need 100%.

How is Disability Insurance taxed?

  • It depends.  If you paid for the premium with after tax dollars, then it is typically tax free.  If your employer paid the premium, or you paid some with pre-tax payroll deductions, then your benefit will be taxable.  There can be partial taxation as well. 

Disability Insurance Tips

  • Insure your OWN occupation.  This means the job that you do versus ANY occupation.  If you are a doctor and you do not insure your own occupation, just ‘any’ occupation, that means that your policy will not kick in if you can go get a job at McDonalds.
  • Some is better than none.  Disability Insurance can be pricey especially if you are trying to insure 60% of your annual income.  You can purchase some.  $2,000 a month benefit could be extremely helpful if you need it.
  • Evaluate your need for Disability Insurance each year.  Most disability policies will not pay out after age 65.  As you age and accumulate assets, you may not need your previous insurance in your later years.  This premium could be redirected towards other needs such long term care insurance.

Remember, this is just an overview of some things to think about.  You should work with a professional when making these decisions.

1https://disabilitycanhappen.org/disability-statistic/

2https://www.ssa.gov/policy/docs/statcomps/di_asr/2019/background.html

3https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/#table2

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