What would you think if you knew you had a 1 in 4 chance of experiencing a debilitating illness or accident during your working life? The statistics are debatable, but if you’re like me, you’re shocked that the risk is much higher than you thought. That’s what disability insurance coverage is for.
When we hear about another person’s tragic accident or illness, a small voice in our minds says, “That won’t happen to me.” It’s a natural response that enables us to live our lives without being in a constant state of panic. But life is unpredictable. One day you’re able to use both legs to walk, and the next your legs are in casts. I don’t say this to scare you, but to remind us that our comfortable bubble of denial can burst at any time—making financial preparation for this possibility an absolute necessity.
What is disability insurance coverage?
First, you need to know that there are two types of disability coverage: long-term and short-term. Short-term disability coverage is typically protected through a state insurance program and covers you for medical situations that last under 3 months. Long-term disability insurance coverage is for any medical situation lasting over 90 days.
If you’re a “low-risk” worker (meaning you don’t work in a “high-risk” environment like a factory) between the ages of 21 and 65, you have a 30% chance of being out-of-work due to a long-term disability. The causes are numerous and include breaking a bone, cancer, complications from pregnancy, and cardiovascular problems.
In the unfortunate event that one of those situations occurs, your disability insurance will kick in to protect you from a loss of income. Let’s say you have some medical condition that requires you to be out-of-work for two years. Your medical insurance may cover most of your immediate medical costs… but how would you cover the additional 24 months of disability?
How does disability insurance protect me?
Without disability insurance, your income simply goes away, causing a ripple in your financial life. You’d probably have to dip into your cash or savings or even your retirement accounts to cover your daily living expenses. Much like having an emergency savings account or life insurance, long-term disability coverage is a key part of building financial resilience in your life.
Watch: Is it Important to Have an Emergency Fund?
And if you’re still hearing that little voice of disbelief, remember: This is not just about you. It’s also about protecting your family. Have a partner? Kids? The need for disability insurance becomes even more pressing. If you have enough money, you may not have to worry about insuring this risk; but for the vast majority of people, that’s not the case.
Make sure to check with your employer about disability coverage. You might have a policy in place and not even know it. But be careful—just because you are covered through your employer doesn’t mean that it’s adequate coverage for your situation. Evaluate your needs and determine the best way to get yourself covered.
There’s a lot of jargon and terminology out there about the type, length, and amount of coverage you can get. A simple rule of thumb? Get covered for 50-60% of your pre-tax income. The benefit is often not taxable, which means you’re replacing your take-home pay. The cost is typically around 1-3% of your income per year. Is that cheap? No. But it’ll be priceless if you don’t beat the odds.
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Jim is a financial advisor and owner of Thinking Big Financial, Inc. Thinking Big Financial is a fee-only registered investment advisor offering financial planning and investment management services. Specializing in working with the LGBTQ Community.
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