How to Prepare for This Nightmare Scenario

If you had an accident that left you unable to work for a period of time... what would you do? Without your paycheck, could you handle all your normal expenses? What would happen to things like your mortgage, utilities, groceries, and phone bill?

Most Americans aren't prepared for this scenario...

In 2019, 69% of Americans reported only having $1,000 or less in savings. That's not even enough to cover a week of many folks' living expenses. According to the U.S. Bureau of Labor Statistics, the average American household spends $5,102 each month.

Let's say your accident leaves you out of work for six months. That means you'd need $30,612 sitting around in cash to take care of your bills while you recover.

That kind of savings could take years to build up, and the worst could happen while you're still nowhere close to that total. So what do you do?

That's where disability insurance comes in...

If you're unable to work for an extended period due to a medical condition, disability insurance can replace the income you lose from not working.

There are two types of disability insurance: short-term disability ("STD") insurance and long-term disability ("LTD") insurance.

The main differences between the two are the elimination period (the amount of time you are unable to work before your benefit kicks in), the benefit period (how long the benefit lasts), and qualifying events (the illness or injury that caused the disability). Many qualifying events can be eligible for either STD or LTD, but which one you qualify for in your specific situation depends on your doctor's diagnosis.

Here's a rundown of the basics for each type...

STD Insurance:

  • Elimination period can be as short as one day
  • Benefits usually last, at the most, up to one year
  • Expect benefits to be limited between 50% and 75% of your normal pay
  • Qualifying events might include injuries from a car accident, short-term illness, or even pregnancy

LTD Insurance:

  • Elimination period is anywhere between 30 days and two years
  • Most benefit periods last between two and 10 years, but they can pay out until the policyholder is age 65
  • Expect benefits to equal around 50% of your normal pay
  • Qualifying events are things that would alter your life for years, like cancer, stroke, or brain injury

Everything from the elimination period to the benefit period and amount varies greatly depending on the plan. Make sure you know the specifics of your disability insurance so you're prepared for any emergencies.

How to Get Disability Insurance Coverage

There are two ways to get disability insurance: through your employer or on your own.

According to the Society for Human Resource Management, 78% of employers offer short-term disability benefits while 63% offer long-term disability benefits.

Most employers that offer disability coverage will also cover the cost of the insurance premium. That means it's just an added employment benefit for you.

However, if your employer pays for the coverage – either in part or in whole – in pre-tax dollars, you'll likely be taxed on any disability income you receive. The amount of the income that's taxed depends on how much of it is due to your employer's contribution. It's important to know that you can't take employer-sponsored disability insurance with you if you leave that employer.

If your employer doesn't offer disability benefits, you can buy your own short- or long-term disability insurance. Some popular providers include MassMutual, Northwestern Mutual, and Guardian. You might even be able to obtain it from the company to insure your car or home. And because you're not getting the insurance through your employer, you can keep it for as long as you want, regardless of any job changes.

Individual plans cost more and have more limited options than employer-offered plans. So shop around to make sure you're getting what you need for a good price.

Who Needs Disability Insurance?

If your company offers disability benefits – spectacular! Read through your coverage so you know all the particulars, but you're already in great shape.

But, if your company doesn't offer disability insurance or the insurance it does offer isn't great, then what?

For young people with families or households that mainly depend on one income, consider disability insurance. It will give you peace of mind.

For older folks, disability insurance makes less sense. If you're nearly old enough to receive Social Security benefits, you don't have dependents, and you can afford a few months of lost income without worry... there's not much point to seeking out your own disability insurance.

If you decide to shop on your own, consider how much insurance you need. How prepared do you want to be? Do you feel comfortable having insurance that covers short-term changes, or do you want to be prepared for the possibility you'd be out of work for several years? How much of your normal compensation would you need covered if you can't work? Is 50% enough to pay all your bills, or do you need 75%?

Also, make sure you're familiar with coverage types that define disability: "any occupation" and "own occupation." Any occupation is the stricter of the two definitions. This type of coverage means coverage only kicks in if your disability prevents you from doing any productive occupation.

For example, say you're a surgeon who loses two of your fingers in an accident. You can't do the specific occupation you've trained for. But if you have any-occupation coverage, your insurance won't cover you because you can still practice general medicine.

If you have own-occupation coverage, this means your disability insurance will cover you if you can't perform your specific pre-disability tasks. Let's go back to the surgeon who lost two fingers... He could perform the surgeries before he had his accident. If he has own-occupation coverage, his disability insurance will cover him.

Disability insurance is an incredible benefit that lots of employers offer. But if you're not covered through work, take the time to think about how you could handle being unable to work, and take a look at the disability insurance options available.

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Here's to our health, wealth, and a great retirement,

Laura Bente, CFP® with Dr. David Eifrig
May 27, 2021