You’re about 20 years old and you have great health, a good job and a bright future – and a 25% chance of becoming disabled before you retire. Surprised? It’s time to educate yourself on the risks in your future and what can happen to your finances and life if you don’t protect yourself financially.
Your ability to earn an income is likely your most valuable asset right now. Your income comes from your talents, skills, education and ability to actually do the job. What if someday you can’t actually do the job anymore?
What happens to your lifestyle, your family and your goals? That’s where disability insurance comes into play.
Many Americans – especially millennials, those born between 1980 and 2000 – overlook this insurance, thinking disability hits only the elderly. Long-term disabilities can occur in many forms, including pregnancy complications, cancer, mental disorders, injuries, poisonings and more. And according to the Council for Disability Awareness (CDA), the average long-term disability claim lasts 34.6 months – meaning your reserve emergency fund of six or so months’ expenses won’t completely protect you.
Disability insurance provides 45% to two-thirds of your income and comprises paid sick leave, short- and long-term disability benefits.
Short-term disability (STD). This coverage kicks in if you’re out of work briefly, typically a few weeks to 90 days. Elimination periods (the time between your disability and the beginning of your payments) usually last about a week; you supplement your income during this time with sick or vacation pay.
STD usually pays up to two-thirds of your income until benefits run out or your long-term policy kicks in.
Long-term disability. These policies pay for an extended time, typically up until you return to work, max out the policy for a certain number of years or reach retirement age.
Elimination periods usually range around a few months but can be longer; benefits commence after your short-term benefits, if any, run out and again pay up to two-thirds of your income.
What if you’re self-employed or your employer offers no insurance? Look at your earnings over the two most recent years when applying for coverage.
Shop different carriers and don’t settle on the first product or provider. Read the fine print, of course, regarding maximum benefits, terms and definitions.
Working with a broker instead of an individual insurer’s agent can help you access a bigger variety of carriers. You also want to talk to your financial planner before purchasing a policy. Good questions include:
- Is the policy “any” or “own” occupation coverage? Does it pay if you can’t perform your own occupation or any job that meets your education and skill level?
- How much of your income is replaced and for how long?
- What’s the elimination period? How much reserve cash do you need to cover that time?
- Will the payouts be pre- or post-tax? This comes into play in employer group policies. If you pay premiums pre-tax or the company pays for you, your benefits are taxable.
Check out this disability security plan from the CDA. Keep in mind that you can’t replace all your income with disability insurance. Your goal: protection and an incentive to return to work.
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Mary Beth Storjohann, CFP, is the founder of Workable Wealth, an RIA in San Diego. She is a writer, speaker and financial coach who is passionate about working with individuals and couples in their 20s and 30s to help them organize and gain confidence in their financial lives. She has been quoted or featured in various industry publications on the local and national level. You can find her on Twitter at @marybstorj.
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