What Is Disability Insurance:
Your ability to earn money is one of the most significant assets that you have. Expenses often increase due to disability, while income is drastically reduced. In the event that you’re unable to continue to earn your income because of illness or injury for any period of time, your family’s financial plans could be ruined.
· NOTE ON SOCIAL SECURITY BENEFITS: Social Security includes a disability feature, but you’re considered disabled only if you can’t perform any work; you have to wait for at least five months to initiate benefits; and the amount you will receive will likely be less than half your income.
The only way to protect yourself and your family from financial disaster is to maintain adequate disability insurance. Disability insurance replaces a portion of your income if you become ill or injured. The risk isn’t something that you likely can bear yourself, so you must transfer the risk to an insurance company.
One of the most significant benefits of owning your own disability insurance policy is that because you pay the premiums, the benefits you receive (should you become disabled) are tax-free. Tax-free benefits of 70% of your current income may be extremely close to 100% of your current take-home pay.
Disability insurance comes in two primary forms:
· Short-term disability insurance provides benefits from the eighth day of disability up to six months of disability. Most employers don’t provide short-term disability insurance benefits, and many individuals choose to self-insure for the first three to six months of disability if they’re buying private policies.
· Long-term disability insurance generally kicks in after the first six months of disability and typically pays benefits until age 65. Employer-sponsored, long-term disability insurance may provide own-occupation coverage for a period of up to two years. At the end of that two-year period of time, or in most cases from day one of your disability, the disability insurance policy pays benefits only if you’re unable to do any meaningful work that you’re reasonably trained to do. Insurance that guarantees to pay if you’re unable to perform the duties of your occupation is substantially more expensive than a policy that guarantees to pay benefits if you’re unable to work at all.
Obtaining as much own-occupation, long-term disability insurance as you can afford makes sense if you have a specialized occupation that would require you to take a significant pay cut in order to work in a different capacity. However, if own-occupation disability insurance is cost prohibitive, having some long-term disability coverage is better than having no coverage at all.