Protecting Your Most Valuable Asset
September 16, 2020
By: Joshua S. Butler, CFP®, CLU®, Vice President and Wealth Advisor at Girard, a Univest Wealth Division
Aside from the occasional sick day and vacation, you would never miss work for an extended period of time, right? Unfortunately, the reality is that more than one in four 20-year-olds will experience a disability of 90 days or more before they reach age 67, according to the Social Security Administration. The impact can be significant – more than 60% of all personal bankruptcies and more than 50% of all home foreclosures are due to a disability.
Many people say, “it won’t happen to me” because they tend to think of worst-case scenarios such as horrific injuries and accidents. However, most disability claims are related to back injuries, cancer, heart attacks, diabetes, and other illnesses.
As you are creating your financial plan, you must consider what you would do if you couldn’t work. How long could you go without a paycheck? This is where disability insurance comes in.
Types of Disability Insurance
The two main types of disability insurance are short-term and long-term coverage. Both of these replace a portion of your base salary up to a cap, such as $5,000 per month, during disability.
Short-term disability comes into effect when you are temporarily unable to work, like if you were kept out of the office for a few weeks due to a back injury. This coverage is typically offered through an employer and, generally speaking, provides coverage from a few weeks to a year. However, your company might require you to use up your sick days before you can turn to insurance.
Long-term disability provides coverage when you’re out of work for longer periods of time due to an illness or injury. Depending on your policy, the benefits could be for a few years or until retirement. Elimination periods, the period you need to be out of work before your coverage kicks in, are generally between 90 and 120 days. It could also kick in after short-term disability coverage has ended.
How much of my income will Disability Insurance replace?
This depends on the terms of your policy, but, generally speaking, employer-provided short-term disability typically replaces 60% to 80% of your base salary while long-term disability typically replaces 50% to 60%. If you ever use the benefit, keep in mind that it will be counted as taxable income. Also, if you earn commissions or bonuses, these will not be covered, only your base salary. Lastly, if you are a high-income earner, your coverage may be capped and replace much less than 50% to 60% of your base salary.
Should I get my own Disability Insurance?
It’s a good idea to supplement employer-provided disability insurance. You protect things like your home, car, and cell phone, so why not protect your income that pays for those items? With a private plan, you may be able to cover 80% or more of your income. Having your own policy enables you to:
- Control the definition of disability. For example, someone who has invested a lot of money in educational training may want a policy that pays out if they can’t work in their specialty.
- Customize the coverage with additional features like cost-of-living adjustments.
- Keep the coverage if you change jobs. Employer-provided coverage ends when you leave the company. Employer-provided coverage will also end if the employer decides to stop providing disability benefits.
- Receive tax-free benefits if you become disabled.
Your most valuable asset isn’t your home, car, or retirement account. It’s your ability to work and earn a living. If you’re interested in learning more about how disability insurance may fit into your financial plan, please reach out to your Girard Wealth Advisor.
This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. The information in this article, and any opinions expressed therein, do not constitute a recommendation or an offer to buy or sell any security or financial instrument. Viewers should consult with their financial and/or legal professionals before making any financial decisions.