If asked to name your most valuable asset, you might say that it’s your 401(k) or perhaps your house. And you’d be wrong.
Your most valuable asset (if you’re still working) is your ability to produce an income. Think about it: If you suddenly stopped working, how long could you continue to pay your bills? The simple truth is, even a brief period of disability could harm your family’s finances.
That’s why everyone who earns a living needs disability insurance. Yet 1 out of every 3 working Americans lacks adequate disability coverage, according to a 2018 report from the Council for Disability Awareness.
The two main reasons for this are the widespread beliefs that:
- Bad things are more likely to happen to other people.
- Disability insurance is just too expensive.
Let’s examine both of these. Nearly two-thirds of working Americans (64%) believe their chances of becoming disabled are only 2% when in fact the chances of your being disabled for 90 days or more is about 30%, according to LifeInsure.com. Also, consider these sobering statistics:
- Disability is the prime cause of about 50% of mortgage foreclosures, says LifeInsure.com.
- One in four of today’s 20-year-olds will become disabled before reaching age 67, according to the Social Security Administration.
As for the disability insurance cost issue, it’s true that disability insurance for individuals is expensive. Annual premiums can be 3% to 5% of your annual salary. But the reason you need this coverage is exactly why you might be hesitant to buy it. Policies are expensive when there is a higher probability that you will file a claim. Thus, the more expensive the policy, the more you need the protection.
Disability insurance comes in two main forms: short-term and long-term.
Short-term disability coverage provides benefits for anywhere from three weeks to a year. It’s meant to help you minimize losses from temporary health issues, injuries or pregnancy. Many employers provide STD coverage as a free benefit, with coverage starting after you’ve used all your paid sick leave. Once benefits start, you typically get 40% to 60% of your pay, and it’s generally taxable.
Long-term disability coverage pays benefits if you’re still disabled and unable to work when your STD coverage ends, and it may continue to pay benefits for years – often to age 65. Many employers offer LTD plans, but you may have to pay for some or all of the cost.
Why not simply rely on getting disability benefits from Social Security? It’s hard to qualify for them. Only about 4 in 10 (42%) respondents in a survey by DisabilitySecrets.com were ultimately approved for benefits.
If you have long-term disability insurance through work, it could provide up to 66⅔% of your income. However, if your employer pays the premium, the benefits are usually taxable. In that case, you should consider buying a supplemental disability policy to help fill the gap. You have the option of paying for private supplemental insurance with after-tax dollars, which will generally result in any benefits being paid tax-free.
Remember that employer-provided coverage ends when your employment ends. Even if you’re laid off, you can still become ill or be injured, so consider getting an individual disability insurance policy – either in place of the policy your employer offers or as a supplement.
Contact us to talk with an Edelman Financial Engines advisor about how to obtain an individual LTD policy to supplement your employer-provided one and whether that might fit into your financial plan.
Neither Financial Engines Advisors, L.L.C. nor any of its advisors sell insurance products. Edelman Financial Engines affiliates may receive insurance-related compensation for the referral of insurance opportunities to third parties if individuals elect to purchase insurance through those third parties. You are encouraged to review this information with your insurance agent or broker to determine the best options for your particular circumstances.