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Beyond Investments- Disability Insurance

Published by: Tim Eichhorn Date: July 17, 2020

Most of us go through life and develop habits of daily, monthly, or even yearly routines. When my children were younger, much of my routine revolved around taking and getting them from school, seasonal sports, and vacations in the summertime. As we settle into our unique routines, we expect that nothing will change and that we will go about our lives like we did the day before. But what happens if the next day is not normal and we cannot go to work? If we cannot earn a living while we are laid up either temporarily or permanently because of an accident, an illness, or even Covid-19.

That is where short term and long term disability may fill a need in our planning. Let’s talk briefly about the types of disability:

Long term disability insurance (LTDI) pays out to you, usually after 90-180 days of disability. We can buy coverage that covers us in our occupation (this is generally ideal), or we can buy it so that it covers us only if we cannot work at all, in “any occupation.” Either way, it is intended for the long term to replace a portion of our income. This type of insurance helps offset the loss of income from disability and usually is not a 100% replacement of income. Generally, most policies either pay until aged 65 or some set number of years between two years to fifteen years.

Short term disability insurance (STDI) can help fill that initial period of 90-180 days before LTDI kicks in benefits. This period is often considered extraneous coverage for someone with ample cash reserves or emergency fund (the oft-repeated 3-6 months of living expenses). While its less expensive price tag might entice some, if you have taken steps to ensure you have an emergency fund, this policy isn’t a necessity.

The federal government offers Social Security Disability Insurance (SSDI) as a part of our social safety net. By and large, SSDI is not adequate in itself for a working family. The average federal monthly payout is just over $1,000 per month to the disabled worker, so that while that would be a helpful supplement, it would not replace enough income to sustain a working family indefinitely. State-level insurance is generally known as worker’s compensation. Again, another social safety net layer can be of help, but with the qualifying factor that disability had to be related or caused by an accident or issue from our actual workplace.

Premiums for STDI and LTDI can total around 1-2% of our income per year to protect or guarantee 60% or more of our income should we become disabled. Higher-income earners sometimes purchase complementary policies that bring their income payout when disabled closer to their working incomes before the incident. An important distinction is if you pay your premiums on this disability insurance, you should expect your benefits to be tax-free. If your employer pays for the policy, the benefits will likely incur taxes.

For most families that we serve, disability insurance plays a vital role in wealth protection. If this type of policy is something that you are considering for the first time, or if you have any questions about existing coverage, please let us know. We are here to help.