Protecting your top financial asset with disability insurance

When asked to name your most asset, what would you say? Maybe you might say that it’s your 401(k) or perhaps your house or your collectable car out in the garage. And you’d be wrong. Your most valuable asset, if you’re still working, is your ability to produce an income. What happens if you suddenly stopped working, how long could you continue to pay your bills? The simple truth is, even a brief period of disability could harm your family’s finances (let alone if something worse was to happen to you).

That’s why everyone who earns a living needs some form of a disability insurance. Yet 1 out of every 3 working Americans lacks adequate disability coverage, according to a 2018 report from the Council for Disability Awareness.

THE TWO MAIN REASONS FOR THIS ARE THE WIDESPREAD BELIEFS THAT:

The two main reasons for this are the widespread beliefs that bad things are more likely to happen to other people or that disability insurance is just too expensive for you. Let’s dive deeper into both of these beliefs. Nearly two-thirds of working Americans (64%) believe their chances of becoming disabled are only 2% when in fact the chances of your being disabled for 90 days or more is about 30%, according to LifeInsure.com. You should also consider these following statistics.

• Disability is the prime cause of about 50% of mortgage foreclosures, says LifeInsure.com.
• One in four of today’s 20-year-olds will become disabled before reaching age 67, according to the Social Security Administration.

It is true that disability insurance for individuals is expensive. Annual premiums can be 3% to 5% of your annual salary, but the reason you need this coverage is exactly why you might be reluctant to buy it. The higher the probability that you might file a claim the more expensive the policies are. Thus, the more expensive the policy, the more you need the protection. Now the protection comes in two forms; short-term and long-term.

Short-term disability coverage provides benefits for anywhere from three weeks to a year. It’s meant to help you minimize losses from temporary health issues, injuries or pregnancy. Many employers provide STD coverage as a free benefit, with coverage starting after you’ve used all your paid sick leave. Once benefits start, you typically get 40% to 60% of your pay, and it’s generally taxable.

Long-term disability coverage pays benefits if you’re still disabled and unable to work when your STD coverage ends, and it may continue to pay benefits for years, often to age 65. Many employers offer LTD plans, but you may have to pay for some or all of the cost.

So why not simply rely Social Security for getting disability benefits? Well for starters it’s hard to qualify for them as only about 4 in 10 (42%) respondents in a survey by DisabilitySecrets.com were ultimately approved for benefits.

But I have long-term disability insurance through work. Now LTD could provide up to 66⅔% of your income, but if your employer pays the premium, the benefits are usually taxable on your end. If that is

the case, you might consider buying a supplemental disability policy to help fill the gap. When paying for a supplemental insurance policy with after-tax dollars will generally result in any benefits being paid out tax-free.

Remember that typically employer provided coverage often ends when your employment ends. Even if you’re laid off, you can still become ill or be injured, so consider getting a form of individual disability insurance policy. Rather it is in place of the policy your employer offers or as a supplement to protect you and your family.