By: Edward Leach, CFP®, MBA
When building a financial plan, many people focus on investments, retirement accounts, and life insurance. However, one crucial component is often overlooked: disability insurance. Your ability to earn an income is your most significant financial asset. Protecting it is as vital as safeguarding your home, car, or retirement savings.
Here’s why disability insurance matters, the difference between short-term and long-term coverage, and the key features to look for in a policy.
Why You Need Disability Insurance
Disability insurance provides income replacement if you cannot work due to an illness or injury. According to the most recent Social Security Fact Sheet, 65% of the Private Sector workforce has no long-term disability insurance.
Without an income, even a short-term disability could derail your financial plans. Medical bills, household expenses, and debt payments can pile up quickly. Disability insurance ensures you can maintain financial stability during difficult times, allowing you to focus on recovery without the added stress of financial hardship.
Short-Term vs. Long-Term Disability Insurance
Disability insurance generally falls into two categories:
1. Short-Term Disability Insurance:
Provides coverage for temporary disabilities, typically lasting 90-180 days.
Often offered as part of employer benefits or can be provided by the state you live in.
It kicks in after a waiting period of 1-2 weeks.
2. Long-Term Disability Insurance:
It covers extended periods, ranging from several years to retirement age.
Usually, it begins after short-term disability coverage ends (typically 90-180 days).
Designed to replace income for severe, long-term conditions such as cancer, stroke, or severe injuries.
You can save money by coordinating any group Long-term Disability Insurance options your employer may offer with purchasing a personal policy.
While short-term disability can cover minor illnesses or injuries, long-term disability is essential for protecting against major, income-disrupting events.
Key Features to Look for in a Disability Policy
When selecting a disability insurance policy, pay attention to these essential features:
1. Own-Occupation Coverage:
Ensures benefits are paid if you cannot perform your specific job, even if you can work in a different role.
It is crucial for professionals in specialized fields like medicine, law, or dentistry.
2. Benefit Amount and Duration:
Choose a policy that replaces at least 60-70% of your income.
Opt for coverage that lasts until retirement age for long-term policies.
3. Elimination Period:
This is the waiting period before benefits begin. Typical elimination periods are 90-180 days for long-term policies.
Balance affordability with how long you can manage without income.
4. Non-Cancellable and Guaranteed Renewable:
A non-cancellable policy locks in your premium rate.
Guaranteed renewable ensures the insurer cannot cancel your policy as long as you pay premiums.
A good reminder to set up your policy on auto-pay so you don’t forget to pay premiums!
5. Residual or Partial Disability Benefits:
Provides partial benefits if you can only work part-time due to a disability.
6. Future Income Rider (Future Increase Option – FIO)
Allows a policyholder to increase their coverage without undergoing additional medical underwriting.
It is encouraged for young professionals who expect their income to grow.
Take Action Today
Disability insurance is a vital safety net that protects your financial future and provides peace of mind. If you’re unsure about your current coverage or want to explore your options, consult your Wealth Advisor. Taking proactive steps now can safeguard your income and help you weather life’s unexpected challenges.
Ed Leach, CFP®, MBA, is a Partner and Wealth Advisor at HIGHLAND Financial Advisors, LLC in Wayne, NJ, and works directly with clients advising them on their financial planning and investments. Ed’s work focuses on the unique needs of business owners, helping them extract value from their businesses while creating efficiencies in their business and personal financial plans. He is also a member of NAPFA, which is dedicated to serving fee-only advisors.