Odds are, if you walked up to someone on the street and asked them what their biggest financial asset was, they’d probably say something like, “My house” or “My car”. What they may not realize though, is their ability to work and earn a paycheck over many years is actually their biggest financial asset. Think for a moment, if you were to become disabled to the point that you could no longer work, how would you pay your monthly bills for the rest of your life? No one ever wants to think it will happen to them, but according to statistics reported by the Social Security Administration, workers in the Millennial Generation are around 3.5 times more likely to become disabled before normal retirement age (67 years old) than they are to die early.
You may be thinking to yourself, “What about Social Security Disability Insurance? Won’t that cover me?” The answer is it might, eventually. However, the Social Security Administration has very strict definitions of disability and you may not necessarily qualify for disability benefits just because your doctor says you’re disabled. If you’re denied for benefits based on the Social Security Agency’s initial decision process, which can take 3 to 5 months, it may take years and an expensive legal battle for you to gain approval and begin receiving benefits.
What all this means is you need something else in place to insure your paycheck. This is where Long- Term Disability Insurance comes into play within a solid financial plan. This type of insurance tends to be overlooked more often than you might think. We encourage clients to have a safety net of at least 3 to 6 months of living expenses set aside in cash as emergency reserves. This amount can be used as short-term coverage if you have a minor injury or illness that prevents you from working for a month or two, or if you lose your job and need to look for another one, to prevent you from going into debt. In addition to emergency reserves, a long-term disability policy will help replace your income in disability situations that last longer than a few months and could last many years. Keep in mind, while long-term disability policies replace a portion of your income, they will not replace 100%. So, you’ll need to prepare to adjust your lifestyle accordingly should you need to tap into this coverage.
Some employers offer disability insurance up to a certain percentage of your income. If your employer offers this benefit, there may also be a “buy-up” option to increase the percentage of income covered. If so, consider taking this option to replace a larger portion of your paycheck during a long-term disability event. If you are self-employed or do not have adequate coverage available through your employer, you should consider the purchase of a private disability policy. When purchasing a private policy, many factors have an effect on your insurance rates. These factors include: your age, income, smoking status, and occupation. As well, the underlying structure of your policy will affect your rates. Cost variances can be due to the policy’s definition of disability, the amount of income the policy will replace, the length of the elimination period (the amount of time that passes before benefits will be paid), and the benefit period. With a private policy, you’ll want to be prepared to pay somewhere between 1% - 3% of your annual salary.
When you’re considering how much to save in your emergency reserves and coordinating that amount with the best long-term disability insurance option for you, use this helpful calculator from the Council for Disability Awareness to sum up your monthly income and expenses. Take a look at your employer benefits to find out if you have access to an adequate group disability policy or if you need to purchase your own private disability insurance. As always, if you’re not sure, bring in an expert (like one of our Certified Financial Planner™ professionals or an experienced independent insurance agent) to help you fit together the pieces of the puzzle.