Why Disability Protection Should Be in Your Financial Plan
March 29, 2022
Here’s a statistic that may stop you in your tracks: At some point before retirement, more than one in four of today’s 20-year olds will be out of work for at least a year because of a disability. If you’re shocked by that, you’re not alone. In fact, surveys show that most people think it will never happen to them.
For most of us, the inability to work for an extended period of time would be a financial calamity. But don’t panic. Ahead, we discuss what a disability is and what steps you can take today so you’ll be financially prepared if that day ever comes.
What if you become disabled and can’t work?
In general terms, a disability is a condition caused by either an illness or an accident that interferes with your ability to work. Some disabilities are short-term while others can last for years or even be permanent.
There are several ways to be financially prepared to face a disability in the future using these resources:
- Social Security Disability Insurance (SSDI)
- Disability Insurance
- Life Insurance
Let’s look at how each one might be able to help you deal with the financial fallout of becoming disabled.
First up, your savings.
The first line of defense for any setback is sufficient savings. Sadly, having savings ready to go is easier said than done, we know. A full 40% of American adults say they do not have enough money on hand to meet a $400 emergency. But a healthy savings account can help you weather those unexpected costs like replacing your leaky roof or covering a vet bill for your furry family member. Experts recommend putting aside an amount equal to three to six months’ worth of expenses just for such emergencies.
Of course, those savings, important as they are, are unlikely to be enough to tide you over if you become disabled and can’t work for a long period. Fortunately, other help is available.
Social Security Disability Insurance (SSDI)
You might think of Social Security benefits as the money you get from the government when you retire, after paying taxes during your working years. But Social Security also provides benefit payments to people who become disabled and cannot work. To qualify for Social Security disability insurance (SSDI), you must have a medical condition that meets Social Security’s definition of a disability:
- It is expected to last for at least one year or to result in death.
- It prevents you from doing work that you did before or adjusting to other work.
SSDI pays only for total disability—not partial or short-term disability. And the benefit amount you receive is not based on household income or the severity of your disability but rather on your average lifetime earnings. Currently, the estimated average SSDI benefit amount is $1,259 per month. That’s not nothing—but many people’s monthly expenses well exceed that amount. And more than 50 million Americans rely solely on SSDI for their safety net against disability.
Disability Insurance (DI)
Enter disability insurance. Depending on the policy, disability insurance (DI) replaces all, or (more commonly) a portion, of your take-home pay if you are not able to work for an extended period due to an illness or injury. There are generally two ways to get DI—through your employer or by purchasing an individual DI policy.
Some companies offer DI to employees as part of their benefits package and pay for the premiums. Other employers may offer DI as a voluntary benefit. That means they let employees buy and pay for the coverage at the company’s group rate, which is usually more favorable than an individual rate. Depending on the cost, you may want to take advantage of this offer if it is available to you.
If you are self-employed and responsible for your own benefits or if your employer DI plan pays only a small portion of your salary, you may want to consider buying an individual DI policy. You can do so through an insurance agent or directly from an insurance company. Individual DI benefits are income tax-free as long as the insured is the one paying the premiums using after-tax dollars.
There are two types of DI: short-term and long-term. A short-term DI policy pays you a portion of your salary if you are not able to work for a short period—typically three to six months. Long-term DI pays a part of your salary (generally somewhere between 50% and 80%) if you cannot work for a longer period—typically more than six months. The benefits you receive from your DI policy will vary according to the insurer’s terms and conditions, so when shopping for DI, be sure you understand the policy’s definition of disability that you must meet in order to qualify for benefits. You should also check how long you’ll need to wait before benefits kick in after you become disabled, how much of a benefit it will pay, and how long the benefit payments will last.
Equally important to know: Like health insurance policies in the past, you probably can’t get DI if you already have a condition that has made you disabled—in other words, a condition that has created the need for the insurance.
You may know that life insurance provides a benefit to your loved ones when you die. But did you know that many life insurance policies today offer benefits that you can use while you’re still alive? When it comes to disabilities, there are three ways that life insurance can help to provide protection.
- Some policies offer what is called a Disability Waiver of Premium rider or a similar name. (A rider to a policy offers supplemental coverage. Some riders are included in the policy while others can be added for an extra premium.) A Disability Waiver of Premium rider stipulates that if you qualify under the terms of the rider, the insurance company will waive the premium to ensure that coverage continues while you are disabled.
- Similarly, many life insurance policies offer Accelerated Death Benefit (ADB) riders. These riders pay part or all of the death benefit to you while you are living if you have a terminal, chronic or critical illness or require long-term care. In order to receive the benefits, you must meet the rider’s qualifications and provide proof that you’ve been diagnosed with a serious illness. Any payout you receive through these riders diminishes the amount left in the policy for your beneficiaries when you die.
- Many permanent life insurance policies also offer a cash value or account value component. Once the account value has reached a sufficient amount (this may take about 10 years or more), you can access it to use as you like. That can come in handy if you are out of work due to a disability and need the extra funds. (Note that any cash you withdraw will reduce the death benefit, and interest withdrawn will be taxable as income.)
Expect the best, prepare for something less.
If you’re lucky, a disability will never take you out of the workforce and you won’t have to turn to any of the options we’ve discussed to make up for lost income. But knowing about those options in advance and figuring out how to use them—alone or in combination—will give you a leg up financially if that occasion ever arises. And in the meantime, knowing you have a safety net in place will grant you precious peace of mind.
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