According to the Social Security Administration, a 20-year-old has more than a 25% chance of becoming disabled before reaching retirement age. Not only would a disability happening early in life be devastating, think about it happening during your career. According to another source, 1 in 5 doctors will become disabled.
Loss of income for such a duration has the potential to cause significant financial hardship. And while Social Security Disability Insurance may help, it’s critical to understand that about two-thirds of initial applications are denied and the average SSDI payment is only $1,534 a month.
Disability coverage may be available through your employer, who may pay all or a portion of the cost for your coverage.
Employer plans typically pay up to 50% to 60% of your income. This limited coverage might not be enough to meet your bills, which is why you may want to supplement employer-based coverage with a personal policy. Supplemental policies may be purchased to cover up to about 70% of your income.
Replacement income can help provide peace of mind when you’re facing the stress and uncertainties that often accompany a disability. Despite the importance of maintaining financial stability, many individuals lack adequate coverage to defend against the risk of disability.
Employer-provided and individual coverage options should be coordinated with Social Security in order to ensure that short-term and long-term disability risks are mitigated.
Taxation of Disability Benefits
When you purchase a personal disability policy, the benefit payments are structured to be income tax-free. Consequently, you may not be eligible for coverage that equals your current salary since your take-home pay is always less.
If your employer paid for your coverage, then the income you receive generally will be taxable. If you paid for a portion of the employer-provided coverage, then the pro rata amount of the benefits you receive are structured to be tax-free.
Choices, Choices, Choices
Consider the waiting period before disability payments begin. A longer waiting period saves you money, but it also means that you may have to live off your savings for a longer period. You are the best judge of how much of this risk you are comfortable assuming.
You also may want to coordinate the waiting period with any short-term disability benefits you could have. For example, if your short-term disability covers you for 90 days, look to have at least a 90-day waiting period so that you can potentially lower the cost of the long-term policy.
Ask how a policy defines an inability to work. Some policies will say “the inability to do any job or task;” others will say “own occupation.” You may prefer the latter definition so you’re not forced to perform some less-skilled, lower-paid work. That type of work may not help you meet your bills. To help you through the complexities of this important topic, we offer this checklist: What Issues Should I Consider When Purchasing Disability Insurance. It covers key considerations, including:
- Short-term and long-term needs
- Federal benefits
- Group and individual coverage options
- Important features and variables
- Tax implications
If you need an introduction to an insurance professional in our network, please let us know. Insurance is an important piece of your financial plan.
Sources:
Social Security Administration, 2024
Disability-Benefits-Help.org, 2024
SSA.gov, 2024
Investopedia.com, July 23, 2023
1 in 5 Doctors Will Become Disabled.