Financial Lifestage - Insuring My Paycheck

Key Points

• Disability income insurance replaces income when you cannot earn it
• If you have coverage, you should understand what it covers
• You may stack your own coverage on top of coverage offered by your employer

What Is Disability (Income) Insurance?

Disability income insurance provides benefits to replace your income when you are unable to earn a paycheck.

Disability benefits generally pay about 60% of what the worker earned at the time of the disability. If the worker earned 100% of a paycheck and paid 30% in taxes, the worker would be left with 70% to spend. The fact that disability insurance pays about 60% provides an incentive for the worker to try to return to work.

Is that benefit taxable? Many benefits paid by companies to its employees are deducted as expenses by those companies, so the benefits may likely be taxable to the employees.

Short-Term vs. Long-Term Disability Income Insurance

If your employer offers disability insurance, then you should ask if this is short-term or long-term coverage and learn more about that coverage. Often, short-term disability insurance covers less than 90 days and begins to pay within 0-14 days from the date of the disability. A long-term care policy often provides coverage beyond that 90 day period up to age 60-70, depending upon the terms of the policy.

Stacking Coverage

The good news is that regardless of whether your employer offers this benefit or not, you are free to buy individually-owned disability insurance to stack on top of your employer’s coverage. Typically the total coverage of both employer and personal disability income insurance plans may not pay the insured worker more than 80% in benefits of his or her salary. If you purchased disability income insurance and paid the premiums using after-tax dollars, the benefit is generally income tax free.

Disability Misperceptions

The first misperception is that most disabilities occur at work. Not true. According to the Council For Disability Awareness about 95% of disabilities occur outside of work and are therefore not covered by workers compensation insurance.

The next fact which is often misunderstood is that injuries are responsible for most disabilities. They are not. Illnesses account for most of the disabilities people suffer.

Top 5 Causes of Long-Term Disability Claims in 2012

56% of new disability claims approved during 2013 were for women
59% of the new claims approved during 2013 were for individuals age 50 or older.
Duration of the average long-term disability claim: 34.6 months

(If you have a rainy day fund/savings, it probably would provide only 6-12 months of monthly household expenses.)

Source for Disability Misperceptions section: disabilitycanhappen.org

The bottom line with disability income insurance is just what the term states: it’s insurance for your income. Why is that important? Because without income how would you pay for all of the things that are important to living your life?

Most insurance policies contain exclusions, limitations, reduction of benefits and terms for keeping them in force. Your representative can provide you with a costs and complete details.

For additional information about disability income insurance, click here.