Long Term Disability

Do You Need Disability Insurance?

If you become disabled due to illness or injury, you may have to quit your job or take an extended leave of absence. You may find yourself out of money within weeks or months. Your employer may allow for an unpaid leave of absence while keeping your benefits – so your health insurance may cover medical costs, but you still need to cover ordinary living costs such as housing, food, and transportation and miscellaneous bills. Disability insurance provides you with a solution to provide the income that you no longer have.

Types of Disability Insurance

Short-term Disability Insurance

Short term disability policies are often covered by employers. They cover you for anywhere from 30 to 90 days, and are often used for things like a planned surgery from which you will make a full recovery. If you have a good emergency fund, covering at least 4 to 6 months of expenses, a short term disability policy is probably not necessary for you.

Long-term Disability Insurance

Most people do need, and should have, a long term disability policy! Long term polices kick in after an initial elimination period without benefits – usually 30 to 90 days.

Policy Basics

If you decide to purchase long term disability insurance, look for the following characteristics (in order from most to least important) to maximize coverage and reduce risk while also managing premiums:

  • Own occupation: Look for an “own occupation” policy that will pay benefits if you cannot do your own, current occupation – for instance, if a surgeon can no longer use his hands, or a secretary develops a condition that prevents sitting for long periods of time. “Any occupation” insurance will only pay out if you are totally disabled to the point of inability to work at all. This means that if you can do any job, even one at a significantly reduced salary, you will not get paid your benefit. These policies are usually  less expensive but not as valuable. Search for own occupation, or a hybrid “income replacement”.
  • Benefit amount: You should look for a policy that covers at least 80% of your salary at the time of disability. Do not buy into a policy that gives a set dollar amount – you never know when you could have a new, higher-paying job or massive raise around the corner!
  • Benefit period: Until age 65. Having a set period such as 5 years will result in lower premiums, but is not a good option for someone in their 50s or younger. You need coverage until retirement age, when you can begin tapping retirement accounts and claiming Social Security.
  • Elimination period: 60 – 90 days, or as long as your emergency fund can cover you before you will need to start benefits. Longer elimination periods mean  paying lower premiums.
  • Inflation adjustments: Pay extra if necessary for a benefit with an annual cost of living adjustment, to help keep up with inflation. If you are disabled at 30 and draw benefits for 30 more years, you do not want to receive the same dollar amount the entire time!

Taxes on Disability Insurance Benefit

If you pay your own premiums, the benefit will not be taxable if it is ever paid out. If your employer pays the premiums, the benefits will be considered ordinary income. If you split the costs, you will pay taxes on a proportion equal to the proportion of the premiums that your employer paid

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