What is Disability Insurance? test

The risk of disability for many Christians is significant and likely higher than the chance of passing away. Losing the ability to work in your prime years leads to severe consequences in your long term financial stability. Historically, long term disability insurance has filled this protective need as an offering commonly found in employer benefits, professional associations, and unions. Due to the mechanics of how insurance companies design disability policies, it almost always makes sense to obtain it with a large group of individuals to get the best premiums. Since this is considered a standard benefit in many professions and rarely purchased in the retail market, few people are familiar with those provisions and features. This article seeks to demystify disability insurance and help you become aware of the benefits available to you should you lose the ability to produce income.

What is disability insurance, and how it works

Disability insurance is a product created by an insurance company whereby you exchange a monthly or per-paycheck premium for guaranteed benefits that last a fixed period. This type of insurance comes in short-term and long-term flavors.

A short-term policy likely covers the first 60 or 90 days of disability, with little to no delay in accessing funds. These policies tend to be more expensive than their long-term siblings because they are on the hook to be tapped first in a medical event.

A long-term policy likely covers you after 60 or 90 days up to a particular period. It typically requires a deductible in the form of several days before you can access benefits. The average policy requires 30 additional days after meeting the disabled eligibility, which essentially means your check will come in at the end of the eligibility month instead of the beginning.

Many people are aware that all working Americans who have worked for a sufficient time to earn eligibility credits get a baseline of protection from the Social Security Disability (SSDI) program. SSDI is a form of long-term disability insurance funded by payroll taxes. SSDI has the strictest disability requirements to qualify for monthly payouts. Many beneficiaries rely on attorneys that help them navigate the byzantine rules that prevent them from accessing this income stream.

Private disability insurance helps fill that gap by increasing the available income and potentially lowering the eligibility requirements, with premiums based on your occupation. If you are a high rise window cleaner, you are likely going to pay more than somebody who flies a desk for a living.

What kind of coverage should I get?

Let’s focus on what kind of long-term disability insurance people should get. We’ll assume that your employer either covers or provides an option for short-term disability at a reasonable cost. If they don’t, it is likely unaffordable to purchase it in the open market unless you belong to a professional association. Besides, if you have a fully-funded emergency fund, you will likely not need to pay high premiums for this coverage.

The two most common types of long-term disability are:

• Own-occupation: Typically, the best coverage is because it protects you if you can’t continue in your current occupation. A surgeon is the classic example of someone who needs this type of coverage, but it applies to any field where skills are not easily transferable to other jobs at the same income level. If a surgeon has an own-occ policy and loses the use of their hands, the policy will cover a percentage of their income because they can no longer operate on patients.
• Any-occupation: Similar to SSDI (although slightly less stringent), the policy will only pay if you can’t perform ANY occupation and are deemed entirely disabled. That means a surgeon who can’t operate but can teach in medical school would not be considered disabled under this policy type.

How much coverage should you have, and for how long?

The most common policy provision is to replace 60% of income. You may have the option of purchasing it before tax (if through an employer) or after-tax dollars. We recommend the latter since the benefit amount will be numerically identical but free from taxes.

SSDI also does not cover 100% of your earnings. Depending on your income level, it can likely cover up to 30% of your employment income. 30% is not enough, and a private policy covering an extra 60% can go a long way to protect the majority of your income. Don’t forget that you have to be virtually unable to do just about any type of employable occupation to qualify for SSDI. It often takes years for people to access benefits.

Last but not least is the length of time the policy provides income. The gold standard is to obtain a policy that provides income through age 65-67 when you will likely become eligible for social security benefits. Pay close attention to the fine print because many policies will probably cover you for two to five years, and then you are out of luck for the rest of your working career.

Conclusion

Although many people are not familiar with disability policies, they are essential to protect your income-earning ability and provide protection for your family. Remember that maintaining a policy that ensures steady income through retirement can make the difference between hard times and a comfortable lifestyle ending in retirement with dignity. Don’t forget to look at the fine print and beware of any crucial provisions, including the length of time benefits will be paid. Always consult with your advisor, who can review the policy documents to ensure the provisions align with your financial plan and coverage best practices.

Leo Marte is a Christian financial advisor and CERTIFIED FINANCIAL PLANNER™. Abundant Advisors provides financial advice for Christians with convenient virtual meetings. Let’s talk if you are ready to make the next move.