Just like life insurance, disability insurance is meant to protect your income from negative, unforeseen circumstances. Just think, what would happen to you, your spouse, your children, or anyone who depends on your income if you could no longer earn a living because of a disability? Emergency funds are meant to cover shorter periods of time, but what if you lost your salary permanently?
The default response to that question is to think “it won’t be me” or to assign a very low probability to the need, but odds are 1 in 4 that you will face a disability that takes you out of the workforce for more than 90 days before you retire. It’s not just extreme injuries that could put you in that position either. Sicknesses, heart attacks, surgeries, and back, hand, or other physical injuries could do it as well.
So, enough dwelling on the risks. Let’s turn to what you can do about it. Here’s what you should look for in a good individual long-term disability insurance policy:
Target Disability Insurance Features
|
Feature |
Detail |
|
Salary replacement |
60-70% of your base salary |
|
Benefit duration |
When you reach retirement age; Benefits end if the disability ends |
|
Waiting period |
90-180 days until your first check |
|
Premium |
1-3% of your salary per year |
Policies vary in their terms, but we recommend finding a policy that replaces your full after-tax income with benefits that continue until retirement age. 60-70% is typically what you’ll look for from an income replacement perspective because disability payments from individual policies are not taxable income. And you’ll want the benefits to continue until retirement if possible, because if the benefits end prior to that, you’ll be stuck in the same place you were trying to protect yourself from.
Employers sometimes offer disability plans as well, but these can be more limited or dependent on continuing employment at the company if the employer pays the premium. An individual policy stays with you regardless of your employment situation and provides you with more control over features and insurance company selection. Even if your employer provides a long-term disability plan as a benefit, remember that payments from employer paid plans are taxable, so you may want to look at alternative coverage to supplement.
In addition to long-term disability insurance, there are short-term policies as well, but building an emergency fund is a better, cheaper way to handle your short-term needs.
To sum up, we recommend that everyone sign up for long-term disability coverage. It’s an added expense, but the coverage greatly reduces the anxiety, stress, and financial hardship that would follow from an already distressing situation.