By One point we often drive home here at Family Financial Partners is the fact that insurance protection for the people and things that matter most is a vital part of any solid financial plan. Most people don’t question the need for health or car insurance, and while many people don’t like to think about it, most client families accept the fact that life insurance is a must. However, one area that often gets overlooked when it comes to insurance is one of the most important – disability insurance.
A disability can not only cause you to lose your paycheck for a period of time but can have long-lasting effects on your family in the form of medical bills, and sometimes drastic lifestyle adjustments. Yet most clients who come into our office do not have any form of disability insurance. For today’s 20-somethings, one in four will become disabled at some point during their working career. Even if you have a solid emergency fund, you may be only one accident and a few months away from true financial hardship.
Disability insurance replaces a portion of your income if you become sick, injured, pregnant or need surgery and are unable to go to work. There are two types of disability insurance: short-term and long-term. These are sometimes offered as an employee benefit from your employer but be sure you understand what you have and any plan limitations before assuming you are fully covered.
Short-term disability insurance typically replaces around 60 percent of your paycheck for three to six months. You can buy this from an insurance company, but we often see this offered as an employee benefit. If this is not a benefit offered to you, some people chose to self-insure for the short term by having a large emergency fund and banking sick time/vacation hours.
Long-term disability insurance typically starts paying its benefit after you have been disabled for anywhere between three and six months and will continue paying anywhere between a few years and until retirement age. LTD is not an employee benefit we see regularly offered, so most people have to buy it on their own.
When reviewing your disability policy, make sure you understand the following:
- Elimination Period – The waiting period from when a disability starts until your benefits begin.
- Benefit Amount – The amount of your income the policy replaces. Often times this is around 50-60 percent of your base salary. Depending on your policy, commissions or bonuses may not be covered.
- Cost of Living Increases – In some policies, the benefit amount is fixed, and some grow by a certain percent every year. Inflation will always be working against you if your policy does not include a cost-of-living increase.
Give us a call if you need help reviewing your disability policy (or any other insurance coverage you have questions about,) or if you have questions about securing the coverage that’s right for you.