What Would Happen If You Became Disabled?

One of the most often over-looked types of risk management is disability insurance.  According to the Council for Disability Awareness, over 1 in 4 of today’s 20-year-olds will become disabled before they retire¹.The odds are staggering, yet many people fail to consider how their families would be impacted if they became disabled.

The good news is that Social Security has a disability component.  The bad news is that Social Security’s definition of disability is extremely stringent.  One must have a condition that is expected to last at least 12 months or end in death and be severe enough to keep a person from doing any substantial gainful activity.  In addition, there is a 5-month waiting period and the Social Security Administration has denied 72% of first-time filers².

Occasionally, employees are offered disability insurance through their job.  Policies through work should be reviewed on a regular basis to ensure the benefits are adequate.  Employer-provided policies generally cover around 60% of base salary.  If an employer is paying the premiums, the benefits will be taxable.

Employer-provided disability coverage may be supplemented with individually-purchased stand-alone coverage.  As part of the review process, be sure that the employer-provided coverage benefits coordinate with the stand-along policy.  Purchasing an individual disability policy with after-tax dollars will allow you to collect benefits tax-free.  Consider the following when purchasing a disability policy:

• How long can I wait after becoming disabled before I need to collect benefits?  This waiting period is how long you will be without income.  Common waiting periods are 90 or 180 days.
• Pay attention to the definition of disability.  Common disability terms are own-occupation and any-occupation.  Own-occupation is preferable as it covers your inability to do your previous job, not just any job.
• How long do you want the coverage to last?  Common choices of disability terms are two years, five years, and until age 65.

Disability insurance is a solid foundation of risk management planning and can provide a financial life raft at a crucial time.  Are you covered?

1. Council for Disability Awareness Report: http://www.disabilitycanhappen.org/research/CDA_LTD_Claims_Survey_2012.pdf
2. Social Security Department: http://www.ssa.gov/policy/docs/statcomps/di_asr/2010/sect04.html