Why Get Short Term Disability Insurance?

Many people ask me what disability insurance is and how it works. Disability insurance, also referred to as income protection or income replacement, is designed to replace a portion of your paycheck if you're too sick or injured to work. Conceptually, this is no different than other forms of insurance we use to protect our assets. For example, homeowner's insurance to protect our house, or auto insurance to protect our vehicles. Disability insurance has the same fundamental approach, The two most common forms of disability insurance are group long-term disability and private or individual disability insurance. Group long-term disability is coverage offered through one's employer that may be provided when hired and while you remain at that company. Group LTD covers a percentage of your income up to a specified monthly cap. Most commonly, 60% of your earnings up to $5,000 or $10,000 per month. Private or individual disability insurance is coverage that one can secure on their own accord in the private insurance market. Most commonly, individual coverage is a fixed benefit amount determined at the time of application. As a privately owned plan, you may take this with you between employers and throughout your career and often have the ability to increase the coverage as your income and protection needs grow. Oftentimes, individual coverage is used to supplement group long-term disability through an employer, but it can also be used as a total or sole solution if the group is not something you're offered. Some people question the importance of disability insurance and if they truly need it. This seems like it should go without saying, but the overarching thought gets lost in all of the moving parts around us. The foundation supporting most things in our lives is our paycheck and our income. Paying our normal living expenses such as our mortgage, utilities, grocery bills, living the type of lifestyle that we've worked hard to achieve and become accustomed to. And when it comes to financial planning as a whole, the roadmap we've invested in and built to our long-term financial dreams and goals. To me, the answer to these questions are pretty simple. Why is disability insurance important? The primary and frankly sole input that drives the lifestyles we live and long-term financial goals that we're working towards is our income. If that changes or goes away, all other outputs or results do as well. In a nutshell, none of these areas matter if we lose what fuels the entire engine. We come to assume that our income will always remain a constant in our lives and plan on it growing throughout our careers. But health events put that assumption at great risk and are not something that we can see coming or predict. However, we can plan for them by protecting our income, in turn protecting everything else that we have worked towards and are planning for. At the end of the day, if you have a paycheck, it is worth protecting. The amount of coverage you need or the type of coverage you need, that will of course vary by everyone's situation. But the need to protect our greatest asset, our ability to earn an income, is universal. It's not something we need forever and once we've achieved financial independence, DI may no longer be necessary. But until that time, it is vitally important. Many ask me what exactly their disability insurance will cover. Outside of a handful of specified conditions and scenarios, DI covers all forms of illness and injuries that prevent us from working. From the most common forms of cancer or diseases to rare illnesses and less severe to traumatic or catastrophic injuries. DI covers all conditions, whether caused on the job or away from work. While DI policies have various features and functions that provide coverage in unique ways, the primary function is directly replacing a loss of income tied to a medical condition that prevents us from working. Most commonly, we see what is called a partial disability, where someone is still able to go to work, but as a result of their condition is not able to work at a full capacity and thus have a loss in earnings. DI policies are designed to help bridge that gap and replace a portion of those losses. I often ask someone how long they feel they could go with a 30% pay cut before making major adjustments to their lifestyle. Six months, 12 months, 18 months. The reality for most of us is not very long. DI of course covers what is known as a total disability as well. In other words, being prevented from working at all and having a total loss of income, whether that's for the long term or while recovering and getting back to work. Some people wonder when the right time to get DI is. The earlier you secure disability insurance, the better. Not only does this allow you to lock in the best rate possible at a younger age, but also lock in your insurability. Assuming approved with underwriting, most policies will include a future insurability rider that allows you to increase coverage to align with growing income without the need for medical underwriting. So any changes in health or new issues would not impact your coverage. Unfortunately, we've had plenty of scenarios where individuals decide to forego income protection, later attempting to secure coverage once a medical issue arises. At that point, they're willing to pay whatever it costs as they now understand the value and the need of this insurance. But it's too late. The earlier you secure coverage, the better, so that we have a plan when income protection is needed most. Many people question if their disability insurance through their employer is enough in the long run. Situations are all different, as are the amounts of coverage provided through employer-sponsored group LTD policies. But the vast majority of the time, the answer is yes. The question just becomes how much and what policy is most suitable for your situation. The first question I would ask when reviewing income protection is what kind of coverage you already have in place. Many times the answer is as general as, it's provided through my employer, so we've checked that box. But when we take a look under the hood and understand what we actually have, that answer changes. Going back to earlier comments, group plans only cover a portion of your income, usually 60%, and oftentimes taxable. So while this is a great foundation to your income protection plan, it's not appropriate to consider this a complete or total solution on its own. This is where coordinating between your employer-provided group coverage and a supplemental individual plan is key. With supplemental IDI coverage, we're able to fill that remaining income gap as best as possible while securing a privately-owned policy that will travel with us and grow with our situations, incomes, and overall careers. A common question we get is, is it enough to just insure our paychecks? Protecting our paychecks to the extent possible through a group and individual DI policy is the absolute starting point. However, one important piece that often gets overlooked is our plan for retirement and the ability to keep that plan on track in the event of a disability. Disability insurance, when coordinated through all available sources, can replace the majority of our take-home pay. That said, it will never fully replace our paycheck and doesn't account for what you may have been relying on for retirement savings. This could be what you were contributing to your 401k and the employer match that comes with it, or even what you were contributing to individual retirement vehicles, which you likely won't be able to fund while going through a disability claim. The other consideration when it comes to income protection is ensuring our ability to continue saving for retirement in the event of a disability. There are various options for disability retirement supplements that can be included as a policy rider or paired with your policy as a standalone option. We can help determine what is the right fit for you, but this is a concept that everyone should be aware of and should consider. A lot of people are curious about the cost of disability insurance. Cost is a relative number, so whether DI is considered expensive or not depends on the perspective for which you're looking at it. When you understand the value of your income as an asset, and thus the value of the insurance you're paying for, it quickly becomes clear that DI is one of the more inexpensive risk management vehicles. For reference, on average, DI will cost 1-3% of the insurance annual income. In most scenarios, this is less than the annual insurance cost for all of our other assets, homes, automobiles, cabins, all while the value of these assets we are protecting is far greater than the sum of our other physical assets. When comparing the premium to the total value of coverage, it actually looks pretty inexpensive. But because the benefit amounts are generally represented in a monthly benefit, the cost can feel high in comparison, which is different with something like life insurance or homeowner's insurance, where it is represented in a lump sum value. People ask me what disability insurance riders are important for them. Disability insurance policies are not one-size-fits-all. Some riders are going to be more essential for certain individuals than others, whether that's due to age, occupation, or other factors. In general, however, there are a few essential riders to a DI policy. First would be the residual and partial disability rider. This rider is what ensures a policy will cover partial disabilities, as touched on before. Many times, disabilities don't prevent us from working altogether, but limit the capacity to which we can work, resulting in a pay cut. This rider ensures the policy will pay a partial benefit in those scenarios to help offset that loss of income. Second would be the COLA or cost-of-living adjustment rider, otherwise referred to as inflation protection when on claim. Protecting the purchasing power of your benefits and income in the event of a long-term disability is crucial, especially at younger ages. And last would be the future insurability rider. This allows us to increase our coverage by purchasing additional benefit to align with growing earnings over the span of our careers, without needing to medically underwrite. What we qualify for and have in place today likely isn't going to be adequate three, five, or even ten years from now. Having this rider allows our policies to grow with our careers and earnings, without the risk of being declined or having coverage modified for new health issues. There are certain aspects of DI policies that are important to consider as well that are not considered riders, such as the definitions or elimination in benefit periods. There are also other riders which we should consider and should be discussed when reviewing your options. Overall, our belief is that a comprehensive and educational approach to understanding your options and what best fits your needs is important. And thus, this is the approach that our advisors and our internal teams take for each and every client, ensuring an informed decision is made and that the appropriate type of coverage is being implemented.