We often talk about the reason you should remove debt from your life is because it eats away at the largest wealth building tool that you have: Your Income! If someone has the ability to earn an average lifetime income of $50,000/year over a 40-year work history, that equates to a $2,000,000 asset! You’d certainly want to protect that in the event something could come into play that would jeopardize your ability to earn that.

Many times, people forgo the need for disability insurance because they feel healthy, may feel like they work in a physically easy job and therefore disability is something they don’t need to consider. But according to the Social Security Administration (who administers one form on disability insurance) a little more than 1 in 4, 20-year-olds, will experience a disability for 90 days or more before the time they reach age 67.

“You never think it’s going to be you”, says Chris Vanderzyden, President of Whitaker-Myers Benefits Division, an independent disability insurance carrier. The question you should consider is, “if I were to lose my income for an extended period of time, would I be financially unstable or ruined?” Mr. Vanderzyden goes on to state, “the average disability claim lasts almost 13 months and mortgage foreclosures, because of a disability, happens about 16 times more often than they do for death. Yet, around 40% of full-time workers don’t have coverage”

To be clear, there are two forms of disability insurance: Short-term disability and long-term disability. We believe with a properly funded emergency fund (Baby Step 3), which should be around 3-6 months of living expenses, makes a short-term disability policy. This generally covers one year or less of a percentage of your base salary (60-70%). John-Mark Young, President of Whitaker-Myers Wealth Managers states, “a short-term policy should only be held by a client, if it is part of an employer benefits package that is either extremely cheap or free”. Your emergency fund is there for a reason and a short-term disability is an emergency. The long-term disability is the emergency that generally can’t be funded by an emergency fund. Who wants to (or can) hold 30 years of earnings in cash?

Long Term Disability

Before we discuss this in more depth, let’s summarize a few basic details about long-term disability insurance.

Amount of Coverage: Typically replaces 40% to 70% of base salary.

Elimination Period: This is the amount of time you must wait from the date of your disability, until when benefits begin. This is typically 90 days for most policies, although, you can make this longer to decrease your monthly premium.

Length of Coverage: Benefits will end when your disability ends. Your permanently disabled benefits will generally last until you become eligible for Social Security, which for most readers is 67.

Pricing: Ranges from 1% to 3% of your annual income. Premium will generally increase for the following reasons: your age (the older you are the higher the cost), women typically file more claims so they pay more, tobacco use will cause an increase, occupation with higher risk of disability will increase costs, the lower you make your elimination period and the higher your income is, the higher the premium, extra features, like cost-of-living adjustments, for inflation will cause your price to rise.

Define Disability: You can purchase own-occupation which is a narrow definition of disability. This means if you can’t perform your own job responsibilities, you’ll get paid your benefit. In contrast, you could have a policy that requires you to only be paid if you’re completely disabled. This means that you can’t perform any job functions, including your own. It will increase your costs to obtain your own- occupation because it’s so narrow. This means the insurance company is more likely to pay.

Where to Purchase: First, check to see if your employer offers a disability policy. You will, generally, get group pricing without having to be approved. If that is not an option for you because your employer doesn’t offer it, or you’re self-employed, then contact an independent insurance agent, like Whitaker-Myers.

Questions to Consider

1. Based on my monthly budget, how much money would I need to maintain the current standard of living or similar, that I have today?

This can help you determine how much of a benefit you would need. The budget to the rescue again!

2. How many months of living expenses is my emergency fund?

If I am closer to three months of living expenses in my emergency fund, I may consider a 90-day elimination period. If I am closer to six months of living expenses in my emergency fund, I may consider a 180-day elimination period, therefore lowering my monthly premium.

3. How long do I want this policy to last?

The longer the policy the higher the cost. Keep in mind some occupations will limit benefits to a certain length of time and no longer, so make sure your insurance agent has an accurate description of your job functions.

4. What if the cost is too high?

You can adjust the benefits if the price is too high. First, increase the elimination period. Second, reduce the payout period (instead of 67 make it pay out for 20 years). Finally, as a last resort, decrease the monthly benefit.

5. Why can’t I just use Social Security Disability Insurance as my disability policy?

It is very difficult and time consuming to qualify for Social Security Disability Insurance. Most SSDI recipients receive between $800.00 and $1,800.00 per month, and the average, for 2021, is $1,277.00. You can expect it to take three to five months, after an application, to get a letter of determination of disability from Social Security, and another month before payments are deposited.

6. Doesn’t Workers’ Compensation cover my disability?

Workers compensation insurance replaces a portion of your income, if you’re disabled because of a work-related injury. All states do require that your employer carry worker compensation for their employees. However, most disabilities are not the result of work-related injuries. The three most common causes of disability continue to be arthritis or rheumatism (8.6 million people), back or spine problems (7.6 million people) and heart issues (3.0 million people).

7. What if I don’t qualify for disability insurance, or what if it’s unaffordable because of my occupation?

As a last resort, consider investing the amount of a disability premium into a non-retirement brokerage account. This will allow you to begin building an asset base that can eventually help self-insure you. For example, let’s assume Billy, who is 24 and out of debt, makes $50,000/year at his employer. He cannot get disability insurance. If Billy can average $221/month (about 5% of his income) into his “disability investment account” and earns a 10% return, then he would be self-insured (around $500,000 in assets) by age 54, which is the average age of a disability claim.

Disability insurance can be a daunting and confusing subject to discuss. Just like any form of insurance, there is a point when you become self-insured and no longer need the coverage should you decide that it’s not in your best interest. As always, your Whitaker-Myers Wealth Managers Financial Advisor is here to help you make an informed decision about what may be best for your specific situation.