What would happen if you were to suddenly become injured or ill and were unable to work for several months? Would you be able to make your mortgage payment? Would you be able to continue paying off your credit card debt? Could you afford to cover your child’s daycare
And what if there were significant medical bills… do you know how you would pay for these? What if you couldn't work for several years? Being unable to cover medical bills as a result of a major injury or chronic illness is actually a leading cause for bankruptcy.
This is a scary scenario!
We all hope it doesn’t happen to us, but in reality, the chances of becoming ill or disabled for a period of time are higher than we’d like. But don’t despair! You can easily prepare yourself and your family for worst-case scenarios by making sure you are properly protected with disability insurance.
What is disability insurance? You may think that this is the same as an Accidental Death and Dismemberment (AD&D) plan through your employer. However, AD&D insurance is a precaution in the event of a sudden death or dramatic event. This will not protect you if you become seriously ill or cognitively disabled and can't perform your main functions at your job.
Disability insurance is a separate plan that covers short-term (usually up to 90 days) or long-term (90 days +) disability periods. In the event you are unable to work, it will typically reimburse you 60% of your previous wage.
Perhaps you already have a disability insurance plan through your employer—great! But it’s important to know that with an employer-paid plan, the money you receive will typically be taxed. This means that if you were paid out 60% of your previous pay, this 60% would be taxed as income and you could receive another 10% or 20% less—ouch!
If you pay for the plan yourself, however, the money you are paid out is not taxed. Think carefully about the total amount you would need if you were unable to work. If your employer plan would be insufficient you may want to look into getting an individual plan.
In addition to the total amount of coverage you will need, there are a few different types of plans to consider. First, if you have a specific skill set (for example, as a surgeon), you will want to ensure that you are covered at your previous income level.
A surgeon who is disabled and unable to perform surgeries might still be able to teach, but his or her income will likely be significantly lower. This is not the income level that he or she would want covered.
Total and Partial disability coverage is a second consideration. If you were totally and permanently disabled, then you would be able to qualify for Social Security income.
However, if you were partially disabled and still able to work three days a week, you would want a plan that with partial disability provisions to make up for the remainder of your lost income.
Thirdly, you might want the plan to account for cost of living and inflation increases. As prices go up, a level monthly payment might fail to cover expenses. Many plans will include a consideration for this that adjusts payments up to meet rising costs over time.
While the majority of long-term disability plans begin at 90 days, you can also choose a plan that will kick in at 180 or 365 days. Similarly, while lots of plans pay out indefinitely or to retirement age, there are plan options that can last for a designated amount of time (such as 2 or 5 years).
Selecting a longer period of time before payouts begin or choosing a plan with a set end period could save you money on premiums.
It’s important to make sure that you are properly covered in the event of a disability and there are lots of options to consider! It’s always a good idea to work with your financial adviser to ensure you've considered all possible scenarios.