You insure your home, car and health against serious harm and even buy life insurance to cover your family if you die. But what about protecting the income you depend on every day to pay bills and fund retirement and college savings?
The possibility that a serious illness or injury could dampen your earnings is real. But you can prepare yourself with long-term disability income insurance, which recoups some of your income should you become disabled and unable to work.
Supplemental income source
Long-term disability income insurance protects income during the most important part of one’s long-term financial plan: the working years. Although no disability benefit will replace 100% of income, it’s typical to expect to receive 60% to 70% of your regular pay.
Make sure you know how your policy defines “disability.” For example, “own-occupation” coverage pays if you’re unable to perform the work you were doing. In contrast, an “any-occupation” policy, which tends to be less expensive, pays if you’re unable to do any work considered suitable for your education and experience levels.
In other words, any-occupation coverage could conceivably require you to change careers — a potentially undesirable situation worth considering when deciding which type of coverage to obtain.
2 types of coverage
There are two types of long-term disability coverage:
- Group coverage. This is a disability policy that covers many people. It’s the type that may be offered by your employer or professional association. Affordability is a key advantage of group plans, but you need to review your plan details carefully because lower-cost plans typically provide fewer benefits and may define disability more narrowly.
Another plus with group plans is that you’ll have an easier time enrolling. Your age, medical history, gender and other underwriting factors likely won’t affect your eligibility. But you’ll typically lose coverage if you leave the company or if the company cancels its policy. To increase your protection, find out whether your employer offers enhanced coverage options (which may be available at a reasonable cost) or seek an individual policy to supplement your benefits. The plan may be set up to tax you on premiums paid but then provide a tax-free benefit, or it may have no up-front tax cost but provide a taxable benefit.
- Individual coverage. An individual policy covers you alone and stays with you regardless of job changes. This plan makes sense if you don’t have the option of joining a group policy or if you need additional coverage.
Individual plans are more expensive. But, with the higher costs, you get more choice in customizing the coverage for your specific needs — for example, selecting the amount of monthly income you’d receive, the duration of benefits and the definition of disability. And, because you’re paying the premiums yourself, the income you receive is income-tax-free.
However, depending on underwriting decisions, you could have difficulty getting approved. Similar to life insurance, individual long-term disability policies typically demand higher premiums for those considered older with more risk factors.
Starting with your group plan and then layering coverage with enhanced options or an individual policy is most likely your best strategy for avoiding a potential income shortfall. If a group plan is unavailable, work with your financial advisor to find the right balance of affordability and benefits in an individual plan.
It’s all about you
Whether you’re married and supporting a family or single with no dependents, your earnings are critical to ensuring your financial stability both now and in the future. If losing the income from your work means you’d have trouble paying your monthly bills, long-term disability income insurance is worth considering. Give us a call and we can help you assess your financial preparedness in the event of a lengthy disability and whether this coverage may affordably provide added security for your future.
Sidebar: The “it won’t happen to me” myth
Disability during your prime earning years is more common than you may think. The Social Security Administration estimates that one in four 20-year-olds will become disabled before age 67. Currently, more than half of disabled Americans are between 18 and 64 years old, according to the U.S. Census Bureau.
Yet most people significantly underestimate their risk. The Council for Disability Awareness (CDA), an insurance industry trade group, reported that 64% of survey respondents believe their chances of an income-limiting disability are 2% or less. Furthermore, illness, not accidents, is the main cause of disability — representing 90% of long-term disability claims, according to the CDA.