Disability Insurance: More Important Than Life Insurance!

If you suddenly die, your paychecks stop forever, but your family still has expenses to pay. Many people buy life insurance to take care of those expenses. But what happens when your paychecks stop and you don’t die? From a financial perspective, that’s worse: Not only does your family have the same ongoing expenses to pay as if you had died, but they also have your food, healthcare, and other expenses to pay. This is what disability insurance is for. It provides a monthly income when you are unable to work due to injury or illness. Disability policies have the following elements:

Definition of Disability

What exactly does it mean to be disabled? A brain surgeon can’t do surgery if they develop a hand tremor. But could they lecture or write books about brain surgery? Could they work for a company that sells surgical devices? Could they work the drive-through window at a fast food restaurant? If the policy defines disability as the inability to continue to perform their job (an own occupation definition) then the policy would pay benefits while they are unable to do brain surgery. If the policy defines disability as the inability to do a job for which they are reasonably suited based on their education, training, or experience (an any occupation definition), then the policy would not pay benefits if they couldn’t do surgery but could lecture or work for the surgical device company. An any occupation policy with a residual disability benefit would pay the difference between what they earned as a brain surgeon and what they earn at their new job, if less. If the policy defines disability as the inability to work at all, then it wouldn’t pay if they could work at the drive-through. While disability policies with unable to do any work whatsoever definitions don’t exist, that is exactly how social security disability works and why it is extremely hard to qualify for social security disability benefits.

Elimination Period

This is how long you must be disabled before the policy benefits begin. It’s like the deductible you have for your other types of insurance, but instead of a dollar amount of claim expenses you must pay yourself before the insurance starts paying, it is the amount of time you must wait. The longer the elimination period, the less the policy will cost, but the more savings or other resources (like credit card debt) you’ll use up before the insurance kicks in.

Benefit Period

This is the maximum period of time for which the policy will pay benefits while you are disabled. A short-term disability policy will only pay benefits for two years or less, giving you time to find other means of support. A typical long-term disability policy is offered with benefit periods of 2, 5, or 10 years, or until age 65 or 67 (when social security retirement benefits would begin). While a to–age–65 policy provides the greatest piece of mind, a policy with a shorter benefit period would cost considerably less. The Council for Disability Awareness states that the average long term disability lasts for about three years.

Benefit Amount

This is what the policy will pay each month while you are disabled during the benefit period. Insurers will allow benefit amounts up to your after-tax income, not your before-tax income, because disability payments are tax-free if the policy premiums were paid with after-tax dollars (in other words, if the premiums weren’t written off as a business expense). Ideally you would purchase the highest benefit amount the insurer offers, but since any benefit amount is better than nothing at all, you can decrease the amount to fit your budget.

Inflation Protection

Wages increase over time to keep up with inflation, as well as to reward workers who take on additional responsibilities or become more productive. A future increase option allows you to increase the benefit amount over time, even if your health has changed for the worse since you bought the policy. You can’t exercise a future increase option when you are currently receiving benefits; to allow your benefits to keep up with inflation you can purchase a policy with a cost of living adjustment provision that increases the benefit amount over time after you begin receiving benefits.

Common Misconceptions

Here are some reasons why people think they don’t need disability insurance:

I’m Covered By Workers Compensation

While on-the-job accidents are covered by workers compensation, the vast majority of disabilities are not work-related and therefore not covered. Also, workers compensation benefits have a maximum ($1,619.15 per week in 2023) that for high wage earners could be less than their after-tax income. Finally, business owners typically are not covered by their business' workers compensation policy.

I’ll Get Social Security

As stated earlier, it is very difficult to qualify for social security disability payments: Only about a third of the social security disability claims filed are ultimately approved.

I Have Enough Savings To Get By

Do you really? Do you have enough savings to cover your living expenses until you planned to retire, plus the additional costs for any care you need, plus fund your retirement?

My Spouse Will Take Care Of Me

If your spouse will take care of you financially, they’ll need to keep working. If you need a caregiver due to your disability, can your spouse afford the cost of one?

Business Disability Insurance

Individual disability policies are designed to protect your income, with the benefits typically used for family needs. A business disability policy is designed to provide for your business' needs, such as hiring someone to replace you or another key employee should you/they become disabled, and to pay your business overhead expenses (loan payments, salaries, etc.) until that replacement is found. The benefit amount of a business overhead policy can potentially be much higher than what you’d qualify for under an individual policy. Also, you can deduct the premium of a business policy on your taxes; that makes any benefit taxable, but the taxable benefit will be offset by the tax-deductible expenses it is paying for.

A disability brings life-changing physical and/or mental hardship that is stressful enough; why compound that with financial hardship? Call us to start a conversation about disability insurance.