Most folks insure for a premature death and that's certainly important. Equally as important, and often overlooked, is to insure and protect yourself and your family should you become disabled. I recently read some pretty staggering statistics on disability via https://disabilitycanhappen.org/disability-statistic/
- 1 in 3 working Americans will become disabled for 90 days or more before reaching age 65
- The average disability claim lasts for almost 32 months or over 2½ years
- 1 in 8 workers will become disabled for 5 years or more during his or her lifetime
- Roughly 12% of the American population is classified as disabled
- 90% of all disabilities are caused by illness not accidents
- Medical issues contributed to 62% of personal bankruptcies
Wow! One has to ask themselves, "Could I keep a roof over me and my family's head if I encountered a long term disability?" If not, you owe it to yourself and those who financially depend on you, to understand more about this important risk protection.
What is disability insurance? Disability insurance is specifically designed to provide benefits when you, the policy holder, can't perform your primary job.
What counts as a disability? It depends on your policy's disability definition. Are you insured for your "own occupation" or for "any occupation"? That is a critical distinction.
- Own Occupation. I am a Certified Financial Planner® (CFP®) and I own my own boutique financial services firm. If I were not able to meet with my clients, strategize about their needs and plans, and oversee running the firm due to an illness, I would want to collect disability benefits. If I couldn't do my specific job and duties, then I would want to be classified as "disabled". So, I have purchased a disability policy with this definition via the Financial Planning Association that protects me and my loved ones should I be unable to act as a CFP®.
- Any Occupation. However, if my policy definition of "disability" was instead "as long as I could do something, i.e. enter data, answer phones or sling hamburgers", then I would not be classified as disabled. Under such a policy definition, I would not be able to collect benefits because I could do another type of job.
Where do I get disability insurance?
- Employer provided. Your employer is not required to provide such coverage but many of the larger employers do. The "devil is in the details". Make sure you know what the coverage provides, when it would begin, etc. so you are prepared in the event of a crisis. Does it provide short and long term disability coverage? How are they different?
- Social security. Generally speaking you must have a strong record of past work and have a severe and well-documented medical impairment that results in you being completely and totally disabled. The qualification process is lengthy, often requires a 6 month waiting period from the time you became disabled and the actual amount is very modest.
- Individual policy. An individual can choose to purchase an individual policy that they own and control, they take with them regardless of employer and customize for their financial and personal preferences. This can augment what they receive from an employer-sponsored plan and possibly what they receive from Social Security.
- Worker's compensation.This coverage protects workers when injured on the job. It could be repetitive use types of injuries like carpal tunnel syndrome or an accident like a fall off a ladder or car accident while on the job.
How much is enough?
It is helpful to calculate the amount of your base level needs i.e. costs to turn on the lights, heat your house, put food on the table for your family, pay your mortgage or rent, loans, etc. From that number subtract investment income. This provides a figure that represents what expenses would need to be covered in the event you are disabled.
The next step is to add up whatever long term disability benefits (often 60% of gross wages) you would receive from an existing disability policy and your spouse's take home pay. This is your income in the event of a disability.
Does your disability coverage and your spouse's income cover your basic needs? Can you live on that income month to month for an extended period of time? If not, you will likely want to increase your disability benefits. If it does adequately cover you, then you have gained the peace of mind that comes from knowing you have sufficient financial protection in the event of a disability.
Next steps?
Ask yourself if you are financially prepared for either you or your spouse to become disabled. Review what is available to you through your employer. If that is not part of your benefits package, you should consider consulting with a professional insurance agent well versed in disability insurance. It is complex, there are many options and the costs vary widely. Sometimes extending your "waiting period" from 3 months to 6 months, could be a big savings on your monthly premiums. Do the research, ask the questions and have a plan. There is too much at stake to leave this to chance.