Disability Insurance Guide

Your ability to earn an income is one of your most valuable assets – and one that’s often overlooked when building a financial plan. Disability insurance helps protect that income in the event of illness or injury, which means it plays a critical role in ensuring your financial plan stays on track, even when life doesn’t.

Yet, according to the LIMRA Insurance Barometer Study, only 14% of Americans own disability insurance. Let’s discuss why this could derail your financial goals.

WHY DISABILITY INSURANCE MATTERS

According to the Social Security Administration, today’s 20-year-old worker has a 1 in 4 chance of experiencing a disability before reaching retirement age.

And the causes of disability are often unexpected. Data from the Council for Disability Income Awareness shows the most common reasons for long-term disability claims include:

• Musculoskeletal disorders – 25%
• Injuries (fractures, sprains, etc.) – 13%
• Cancer – 12%
• Mental health issues – 10%
• Circulatory conditions (heart attack, stroke, etc.) – 8%
  

Disability can be classified as:

• Short-term disability – Typically lasts a few weeks or months
• Long-term disability – Can last for several years, or even until retirement
  

But whatever the reason or classification, the financial consequences can be severe. Roughly 44% of consumer bankruptcy filings cite medically related income loss as a contributing factor. So, you can see why protecting your income can be so critical to keeping you and your family on solid financial footing.

HOW GOVERNMENT DISABILITY PROGRAMS WORK

The government has programs – Social Security Disability Insurance and Supplemental Security Income – that are designed to help individuals with disabilities maintain a basic standard of living. They differ significantly, however, in how they determine eligibility and what benefits they provide.

• Social Security Disability Insurance – An earned benefit, which is available to individuals who have worked and paid into Social Security through payroll taxes. To qualify, you must have a medical condition that meets the Social Security Administration’s strict definition of disability and have accumulated enough “work credits” (typically 40 credits, with 20 earned in the last 10 years, though younger workers may qualify with fewer). SSDI pays monthly benefits based on your lifetime earnings and may also extend benefits to certain family members. After receiving SSDI for 24 months, you become eligible for Medicare.
• Supplemental Security Income – A needs-based program, which is available to individuals who are disabled, blind or age 65 and older, with very limited income and available resources. Unlike SSDI, SSI does not require a work history. Instead, eligibility is based on financial need, with strict limits on income and assets (typically no more than $2,000 for individuals or $3,000 for couples). SSI provides monthly cash payments to help cover essentials like food and housing, and recipients often qualify for Medicaid. In some cases, individuals may be eligible for concurrent benefits, receiving both SSDI and SSI.

HOW EMPLOYER BENEFITS COVER DISABILITY

Many employers offer group disability insurance as part of their benefits package. These plans typically come in two forms: short-term disability and long-term disability. Short-term coverage usually kicks in after a brief waiting period and can replace a portion of your income – often up to 60% – for a few weeks to several months. Long-term disability is designed to support you for an extended period, sometimes until retirement, depending on the policy’s design. In many cases, employers cover the full cost of STD, while LTD may be employee-paid or a shared expense. But it’s important to understand the fine print, especially how the policy defines disability, how long benefits last and whether benefits are taxable. If your employer pays the premiums, any benefits you receive may be considered taxable income.

WHY RELYING ON GOVERNMENT OR EMPLOYER BENEFITS MAY NOT BE ENOUGH

Counting on SSDI alone is often a poor strategy. Most initial applications are denied, and the appeal process can be lengthy. Even approved claims offer limited support. Here’s what you can typically expect:

• Average SSDI benefit (2025): $1,600/month
• Maximum SSDI benefit: Just over $4,000/month
  

You may be wondering, “What about workers’ compensation?” Well, that is an entirely different, state-mandated insurance program that only applies to work-related injuries or illnesses … and less than 1% of workers miss work due to occupational causes.

EVALUATING GROUP DISABILITY COVERAGE

To determine if your employer’s group disability insurance is enough, you should consider three key factors:

1. Compensation. Most group policies cover up to 60% of earnings, but that often only applies to base salary. Commissions and bonuses may be excluded, creating a coverage gap.
2. Caps. Group plans often cap monthly benefits. For example, a plan may replace 60% of earnings, but only up to $7,500/month, so high earners may face significant shortfalls.
3. Taxes. If your employer pays the premiums, benefits are taxed as ordinary income. Assuming a 30% tax rate, your net benefit is only 42% of your salary (70% of 60%).

So, what could a real-life scenario look like? Let’s say you earn $250,000/year, with $175,000 base salary and $75,000 in commissions/bonuses.

You might expect $12,500/month in benefits (60% of $250,000 ÷ 12). But the reality is:

• Only your base salary is covered, so 60% of $175,000 = $8,750/month
• The policy cap reduces your benefit to $7,500/month
• After 30% tax, your net benefit is $5,250/month

That’s a coverage gap of $7,250/month!  

Even if you don’t receive incentive pay or exceed benefit caps, taxation alone creates an income gap for anyone with employer-paid disability insurance.

BRIDGING THE GAP

You also have the option to purchase a supplemental disability policy through a broker to help fill the gap. These policies are customizable and can be structured to provide tax-free benefits if paid with after-tax dollars.

A financial advisor can help you assess your current coverage and determine whether a supplemental policy makes sense as part of your personalized financial plan.

WORKING WITH AN ADVISOR TO HELP PROTECT YOUR LIVELIHOOD

Protecting what you’ve built is just as important as growing it. Our advisors can work closely with our internal insurance experts to help you evaluate your coverage needs, understand your options and make informed decisions tailored to your unique circumstances.

Whether you're reviewing existing policies or exploring new strategies, we’re here with additional resources and insights that support your long-term financial wellbeing and help ensure your financial plan stays on track - no matter what life brings.