Disability Insurance and You

Many Americans are living paycheck to paycheck — a staggering 78 percent of us, according to a recent study by Career Builder. That creates a very delicate financial situation that could be thrown off kilter by an accident, unexpected illness, or a big family emergency.

It’s not something anyone wants to think about. And even if you aren’t living paycheck to paycheck, it’s something to consider. It is important to prepare for how you would cope if you became unable to work for a living — temporarily or long-term.

There are two main schools of thought: Either you pay for disability insurance to cover part of your income if you can’t work, or you set aside a stash of cash — in essence, self-insuring. The biggest questions to answer for yourself: Should you spend money on something you might not ever need — and how much capital will be lost if you don’t actually ever need to take it? Should you take that premium expense and just stash that into a savings/emergency fund account and set it aside in a safe place?

Many employers offer a certain amount of coverage as a benefit, or at a greatly reduced cost to employees. Some also offer employees the opportunity to beef up existing coverage through payroll deductions. If you are a dentist, a physical therapist, or work in another profession where your hands are a necessity, you might need to find your own insurance. For those of you whose income would be halted or seized altogether due to a physical injury, consider looking into coverage. 

If you are covered through your employer, any benefits paid out to you are taxable. You will owe Uncle Sam on that pay — likely at 60 percent of your income — come April 15. But if you pay for your own insurance privately, when you are receiving benefits, it is not taxable to you — you already paid taxes on the money going to cover the cost of the policy.

In many employer-provided policies, if any covered hardships did occur, and coverage activates, you could be eligible for short-term disability for three to six months. After that period of time, the long-term disability insurance would pick up from there, anywhere from a couple years until you are 65 years old. This biggest question here is how much do you need? A savings account probably wouldn’t have the legs for that type of coverage. 

If you do decide to take the disability insurance plunge, or if you want to learn more about what’s best for your personal situation, talk with a fee-only CERTIFIED FINANCIAL PLANNER™. Your financial planner will have your best interest in mind and can help you protect your income based on your needs, values and financial goals. 

Kelly Luethje is a CERTIFIED FINANCIAL PLANNER™ professional and founder of Willow Planning Group, LLC. She provides financial education and guidance to help you live life on your terms. Kelly can usually be found on a mountain, or by a lake, working virtually with clients across the country.