In my experience of working with clients over the years, I often times see that people neglect to sign up for disability insurance through their employer. In today’s blog post, I will discuss whether or not it’s wise to forgo this coverage.
First, we must distinguish between short term and long term disability insurance.
SHORT TERM DISABILITY INSURANCE
Short term disability insurance is designed to pay you an income in the event that you are disabled for a short period of time. Usually this time frame is around 3 to 6 months. If your disability lasts longer then this, then long term disability insurance kicks in (if you have it).
In reality, short term disability insurance is not as important as long term disability insurance for a couple of reasons. First, as the name implies, short term insurance only provides an income for a short term, whereas, long term insurance can pay up to age 65 or longer. Second, your emergency fund (3 to 6 months of expenses in savings) is designed to cover short term emergencies. So, even if you don’t have short term disability insurance, your emergency fund can step in and fill the role.
LONG TERM DISABILITY INSURANCE
Long term disability insurance is coverage that is designed to pay you an income in the event that you are disabled for a long period of time. Usually this time frame would last from 6 months until age 65. In some cases, depending on your policy, your coverage could last your entire lifetime.
DOES IT MATTER WHO PAYS THE PREMIUMS?
If you are allowed the option, you should pay the premiums instead of your employer. You may be thinking, “Why in the world would I do this? If my employer is going to give me something for free, then shouldn’t I take it?”
Well, the answer is no.
Remember that there is no such thing as a free lunch. The way the IRS rules work are as such. If your employer pays the premiums then every bit of your disability income will be taxable if you have a disability. For example, if your salary is $100,000 and your disability insurance pays out 60% of your salary if you are disabled, then you would expect to receive $60,000 per year. However, if your employer paid the premiums then this entire $60,000 would be taxable. If you are in the 25% federal tax bracket and 6% state tax bracket, then your $60,000 would be reduced to only $41,400.
On the other hand, if you paid the premiums (which are usually not that expensive), then you would receive a full, un-taxed $60,000 per year in the event of a disability.
So, if faced with the choice, then make sure that you pay the premiums. If your employer pays the premiums then talk to HR to see if they could amend the plan or perhaps allow you to pay your own way.
Statistics show that you are more likely to become disabled than to pre-maturely die.
According to the Social Security Administration:
25% of 20 year olds will face a disability before they reach retirement age.
1 in 5 Americans live with disabilities.
Approximately 30% of all people ages 35 to 65 will suffer a disability for at least 90 days and 1 in 7 can expect to become disabled for 5 years or more.
As you can see, the numbers more than speak for themselves.
In conclusion, think about this question: How long could you live without a paycheck? If you and your family are dependent on your income then it is imperative that you protect this income with a long term disability insurance policy. You will likely have to wait until your open enrollment period at your employer to do this, but as soon as that time arrives be sure to take advantage of this coverage. And if your employer doesn’t provide long term disability insurance or if you are self-employed, then be sure to obtain a private policy. And the good news is that if you can obtain this coverage through your employer, the cost is usually minimal considering the amount of protection you will get.
I would love to hear your thoughts on long term disability insurance. Do you think it’s worthwhile? Have you chosen to forgo this insurance over the years? Feel free to share any questions, comments, or experiences you have below.
If you’re new to our blog and wish to receive weekly financial planning tips, please sign up for our eContent.