Do You Need Disability Income Insurance?

    Most individuals think they will never get too sick or injured to work and make an income.  With lots of work now being done online, most feel they will always be able to do some aspect of their job to bring home the bacon.   However by having disability insurance, which is insurance protecting your income, you can add more flexibility to your financial options in the event that you do get too sick or injured to do your job.

    Why is it so important?
    Income is a major factor in wealth creation over time.  You need to make sure you are protecting your ability to earn an income throughout your working years, and the more income you can protect the better.  This is where disability insurance steps in.  If an unforeseen event comes along, having disability insurance, that will pay out a monthly benefit or income to you, will help you maintain your current lifestyle and not completely wipe out any financial foundation you have already built (i.e. cash accounts, retirement accounts, etc.)

    So what are your options for getting Disability Insurance?
    If you are employed, chances are your employer offers some sort of group disability insurance you are automatically enrolled in or have the option to enroll in.  Because it is a group insurance plan, you do not have to go through underwriting requirements with the insurance company and therefore you can just enroll in the plan.  Most group disability insurance plans will cover 60-70% of your base salary in the event of a disability.  The disability insurance may be divided between short term and long term disability; short term coverage usually starts after 7 days and lasts for 1 year and long term disability starts after 1 year from the disability event and usually pays to age 65 or sometimes even 67 years old.

    What if I am self-employed or my employer doesn’t offer Disability Insurance?
    In this case, you will have to look into individual disability income insurance coverage.   Some key points to understand about individual coverage is you will be the one paying for the entire premium.  Unlike group disability insurance, which usually is partially or totally paid for by your employer, individual coverage is solely paid for by you.  That means the premium may be higher than a group plan.  The good news is that if you claim benefits from your disability insurance plan, the benefits will come to you tax free.  This means that if you had disability coverage of 60% of your income, when you factor in the tax free status of the benefit, it really can equate to more like 70-75% of your income covered.

    How much Disability Insurance can I get?
    I have a lot of clients ask me if there is a way cover 100% of their income.  And the answer is no.  The insurance companies will never cover 100% of your income, because if they did, no one would ever go back to work after a disability claim.

    What if I have Disability Insurance coverage at work, should I still get individual supplemental coverage?
    It depends.  Since most group disability plans usually only cover base salary, if you are someone who earns lots of bonuses, commissions, or have extra side income, then you may want to consider adding supplemental individual coverage to your group insurance plan.  That way, in the event of a disability you are actually covering about 60-70% of your TOTAL income and not just your base salary.  See my example below for further details:

    Base Salary= $100,000
    Bonus= $25,000
    Total income= $125,000
    Group disability insurance coverage= 60% of base salary only= $60,000 per year
    $60,000/$125,000= 48% of your TOTAL salary covered

    Now, let’s say you add a supplemental individual policy that will pay an extra $24,000 per year in coverage, so now your total disability insurance benefit= $84,000/$125,000 or 67% of your total salary covered.

    How much does it cost?
    It really depends on the type of plan you get, i.e. amount of coverage, length of benefit, length of wait period, your health status, etc, but typically annual premiums will range from 1-3% of your annual salary.

    Final Note
    As you build your financial foundation and work toward saving for your financial future, you need to protect yourself and your assets along the way.   Insurance becomes a way to shift the risk to the insurance company.  Although most individuals are not fond of having to pay for the different types of insurance they need, insurance is the glue that holds everything together in your financial picture should something unexpected happen, such as becoming too sick or injured to work.  As much as we like to think nothing bad will ever happen to us, the reality is sometimes they do.  And if and when they do, we surely will be glad we had insurance coverage!

     

    Disclosure- Guarantees are based on the claims paying ability of the issuing company.

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