Protecting Your Largest Asset

Recently, I talked with a couple of clients regarding their employer-provided disability insurance coverage. One of my goals for 2021 is to increase your awareness of its importance within your overall financial wellness plan. For example, while many of you have some level of group disability coverage through your employer, how closely have you studied the details? Do you know if it is enough coverage, given your own personal financial situation and potential needs?

I’d like to start a discussion about this with you during our annual client reviews this month. For now, here’s a quick “Disability Insurance 101” Q&A to get things started!

Why is disability insurance important?

Your ability to earn a living is your most important asset — although I bet you never thought about it this way. Disability insurance is one of the best ways to protect it. Think of it as insurance for your paycheck (just in case you’ve never seen one of those endless series of AFLAC ads featuring the quacking duck). Disability insurance provides you with a percentage of your income if an illness or injury prevents you from working and earning a living. You don’t hesitate to insure your home, car and phone, so why wouldn’t you also protect what pays for all those things—your paycheck.

Do I need disability insurance if I work?

Disability insurance is something anyone who works and has earnings should consider. In fact, according to the Social Security Administration, one in four people today will become disabled and potentially face financial hardship at some point during his or her working life. Disability insurance income helps cover expenses if you can’t work because of an illness or injury. There are disability insurance policies tailored to workers in specific professions as well as disability insurance for self-employed individuals.

What are the types of disability insurance?

There are two main types of disability insurance: short-term disability insurance and long-term disability insurance. Short-term disability insurance covers lost income for about three months while long-term disability insurance typically pays a portion of your lost income for anywhere from one year to your entire life.

How much disability insurance do I need?

You can calculate how much disability insurance you need by adding up your monthly expenses. Then add up how much disability insurance you already have as well as any personal savings you could draw on if you couldn’t work. If that number is less than your monthly expenses, you might consider buying more disability insurance. 

How do I get disability insurance?

The main ways to get disability insurance are through your employer, through a professional organization, or on your own. Buying disability insurance yourself, through an insurance company, is typically the most flexible and reliable way to get coverage.

How much does disability insurance cost?

The cost of disability insurance depends on several factors, including your benefit amount, benefit period, occupation, health status, age and terms of the policy. As a general rule of thumb, the disability insurance cost for a long term individual policy is 1% to 3% of your annual salary.

How should I manage my disability insurance policy?

It’s always a good idea to review your disability insurance with a financial planning professional or licensed insurance agent whenever you experience a life change. This can include accepting a new job, getting married, welcoming a baby, assuming new debt or receiving a substantial raise at your job. It’s also a good idea to review your disability insurance benefits once a year with a financial professional (or licensed agent) to make sure everything is in good shape.

How do I receive disability insurance benefits?

You can file a claim to receive disability benefits through your employer’s human resources department if your policy is through work or through your licensed insurance agent if you bought the policy on your own. To receive disability insurance benefits, you will have to meet the disability definition as it’s defined in your policy. There may also be a disability insurance elimination period, which is a waiting period that can last anywhere from a few weeks to a few months before you can receive benefits.

Feel free to visit the Council for Disability Awareness website for more information (www.disabilitycanhappen.org)

Additional sources: Social Security Administration; Council for Disability Awareness; Kmotion Research.

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