Disability insurance is a key component to a stable financial foundation. Disability insurance ensures maintenance of lifestyle, and income, should an individual become unable to work. Though there are various types of disability policies issued by many companies, the basic disability policy provides coverage for approximately 60% of earned income to age 65. Slightly higher and lower percentages may apply based on an individuals income level.
When disability insurance is mentioned, we must make the distinction between short term disability and long term disability. Short term disability primarily covers periods of 6 weeks or less, depending on the policy and degree of disability. Long term disability will generally cover a term to age 65, but will not to begin until 30, 60, 90, 120, or 360 days after a disabling event has occurred. The longer the period before benefits begin, the cheaper the premium required. Some long term policies may include short term disability in their contracts.
Though group disability insurance can be offered through employers, individual policies are also available for purchase. Group disability can be relatively cheap based on the characteristics of the group being covered (i.e. age, general health, and claims). Individual disability is based entirely on the characteristics of the individual, such as age, health and occupation at the time of purchase. For the purpose of this discussion, we will look primarily at long term disability, commonly referred to as LTD.
Long term disability is best utilized when maintenance of lifestyle is dependent upon maintenance of income level. In all other scenarios where assets have been accumulated to take the place of earned income, disability insurance becomes pointless. A cash flow projection based on an individuals assets, income level, and spending level should be run to determine whether disability insurance is needed. In instances where an individual’s financial independence is tied to their continued ability to earn income, disability insurance can be key in protecting against unforeseen disabilities that could negatively impact the ability to earn income.
Disability insurance has many coverage types. There is temporary- total disability, where the expectation is a change from total disability to partial disability or even full recovery, and permanent- partial, where a portion of function is permanently lost but an individual is not totally disabled. Any of these variations can be included in the policy itself or as a rider. This can be beneficial, in cases where there is a family history of stroke, heart disease, etc.
Disability insurance is usually necessary at some point in life for most people, but once financial independence has been reached, its usefulness diminishes greatly. In order to determine your own need for disability insurance, contact your financial planner or insurance professional. For more information contact Henssler Financial at 770-429-9166 or [email protected].