Disability insurance covers your earned income in the event of a disability that prevents you from doing your job. If you are no longer able to earn an income, but still have spending needs, then you can end up being a burden on your loved ones. The loss of an income can be financially devastating if not properly planned for; having a safety net can make a lot of sense, particularly for families with a sole breadwinner.
Who Should Have Disability Insurance
Typically, all employed people should consider this type of insurance. Because its main purpose is to replace income lost due to a disability, it’s good for self-employed individuals, households with a nonworking spouse, and people without an employer sponsored policy. Disability insurance is usually structured to replace 60%-70% of monthly income. You can choose the length of your elimination period (the period between injury and receipt of benefit payments); although 90 days is the most common length, you should choose an elimination period that aligns with your emergency savings.
Disability Insurance & Employment
Companies may also take policies out on “key” employees, which is called “Key-Person Disability” insurance. This type of disability insurance aims to financially protect a company in the case that a key employee becomes disabled. If you are self-employed, you can buy disability insurance for yourself and can write it off as a business expense.
It’s especially important if you are self-employed to have this type of insurance, since your business likely would struggle to function in the event you are not able to work, and you need this as income replacement. It can also be very useful for one-income families or those with tight cash flows.
Short-Term Disability Insurance
Short-term disability coverage, which typically provides coverage for less than a year, is often packaged as an employee benefit, and offered through your workplace. If you have a company-paid plan, then the disability payments received will be taxable. Premiums are usually based on age, job title, health, elimination period desired, monthly benefit desired, and length of coverage.
Long-Term Care Insurance
Long-term disability insurance is usually purchased privately. The claim may last from one-to-three years, but when you purchase the policy, you have the option to choose multiple benefit durations. These can range from two years, all the way to the age of 70. This will affect the cost of your policy, but it’s something you can elect at the time you purchase it. Individual policies are a tax-free benefit if paid for by the insured.
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Amin Dabit, CFP®
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