A One-in-Four Chance
Here’s a stat for you: According to the Social Security Administration, a 20-year-old worker today has a 25% chance of becoming disabled and unable to work for six months or longer prior to reaching full retirement age.
It’s an interesting thought, actually. Not because the topic itself is all that fascinating but simply because, for something typically so far on the back burner it’s almost off the stove, the chances of it happening to you, your spouse, your co-worker with the office next to yours, or your best friend is almost a statistical lock.
I don’t write about insurance a lot, primarily because I know some people would rather chew on glass than read about it. However, no one’s personal financial plan is complete without paying attention to common-sense asset and income protection. Pay a few minutes of attention here for a quick primer on accident and sickness insurance — aka disability insurance — coverage designed to protect your income.
I’m going to focus on private insurance coverage, but understand that if you pay into Social Security — which most do — you may be eligible for disability benefits under Social Security. The problem is that the Social Security Administration’s definition of disability is one of the most stringent around — so much so that some attorneys base their entire practices on fighting Social Security disability decisions.
Social Security aside, the most common place you’ll find disability insurance offerings is through your employer. Usually, you’ll see coverage for “short-term” and “long-term” disability. Short-term coverage often refers to a period of six months or less while long-term refers to a period beyond that and often up to your 65th birthday.
While some employers pick up the entire premium, an employee will usually have some portion of the premium to pay. Many times, employees have a few options in varying percentages of current income as benefit options to choose from. With most employer-sponsored plans, employees or their employers make pre-tax premium payments, making the benefit payments — should you receive them — taxable to you.
If you’re self-employed, in a situation where your employer doesn’t offer coverage, or your employer doesn’t provide enough coverage for your needs, you can purchase disability insurance individually. Individual policies can be more or less expensive than group policies, depending on a number of factors including age, occupation, and health history.
Individual policies also tend to be far more customizable, allowing you to select an elimination period — akin to a deductible — inflation riders, and even specific disability definitions. Because most with individual disability insurance policies pay premiums with after-tax money, benefits are tax-free to you, if paid.
Then there’s the default option — retaining the risk yourself and using your own financial resources to replace your income. For a long enough period of disability, this could result in something akin to a forced early retirement. Such a situation could be financially devastating. However, short-term disability scenarios are far easier to self-insure. Think of a short-term disability fund as an emergency reserve that’s supercharged to replace income until long-term disability insurance coverage will provide you benefits. While you’re still saving to get there, short-term insurance coverage can hedge your plan and, when you reach your target, you can cut the short-term insurance loose.
Whether through your employer or via an individual policy, disability insurance can help you protect one of your biggest assets: your income. And when you protect your income, you can also protect your ability to save, which, in turn, helps protect your ability to achieve future goals.