Your Risk of Becoming Disabled
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Many people become temporarily or chronically disabled at some point in their working career.
If a disability would affect your ability to meet your financial goals, obtain insurance.
People who are retired or financially independent do not need to obtain disability insurance. Disability insurance is necessary for anyone who depends on their income to cover their expenses and savings goals, and would be presented with a hardship if their income was lost.
Understand the different ways to obtain disability insurance.
Social Security Disability Income (SSDI)
Log into ssa.gov to see how much disability insurance you are eligible to receive if you were disabled today. That being said, PWR does not plan on this money when doing projections for clients because Social Security has a narrow definition of who qualifies for SSDI. It must be a total disability and the benefits are notoriously difficult to obtain.
State Policy
Some states, such as California and New York, have mandatory payroll deductions that fund short-term disability insurance for workers. If you live in a state that offers this kind of program, obtain the details of the benefit to ensure it is adequate for your needs. You may find it is a good baseline, but you want to obtain an additional policy to supplement it. In the case of California's plan, for example, the benefits last 52 weeks so you would want to at least obtain a separate, long-term policy that would cover you until retirement age.
Group Policy
Many large employers will offer short and long-term disability insurance policies for their employees. Some will automatically enroll you and others require you to elect enrollment during an open enrollment period. Policies funded by the employer will pay out taxable benefits. Policies funded by you will pay out tax-free benefits. If your employer offers a disability policy, it will almost certainly be more affordable than a private policy because the risk is spread among the participants in a group plan. The downfall is that your insurance is tied to your employment. If you lose your job, you may lose your policy if it is not portable.
Private Individual Policy
This policy will likely have the most expensive premiums. There will be an underwriting process to verify that the insurance company is comfortable insuring you for the requested amount. Reach out to any organizations that you belong to because they may offer discounts to their members on a group disability policy. For those that do not qualify for insurance, such as those who have pre-existing conditions, save aggressively and pay down debt to increase the probability of achieving financial independence before a potential disability occurs.
Meet with a fee-only, fiduciary financial planner who can help you ask the right questions for your situation.
How much disability insurance do you need?
What type of policy do you have or need to obtain? There are policies that cover your inability to do a specific job or your inability to do any job. For example, some policies won’t pay a surgeon when he loses the ability to perform surgery if he can still work at other types of jobs.
If you have a policy, are the benefits taxable or tax free?
If you have a policy, do you know the elimination or waiting period? This is the period of time between when you file for disability and when benefits begin. Create a plan to cover your expenses during that waiting period.
Do you need an individual policy or is a group policy sufficient?
Originally published 8/29/2012.
Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.
Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.