Over 1/3rd of Americans over the age of 55 are disabled. Although disability can take many forms, the ultimate result is a loss of both income and the ability to do the things we enjoy. Often disabilities are sudden (injury, heart attack, stroke, and others) so we need to be prepared well in advance. Being prepared starts with an analysis of who is going to be hurt if we are disabled, followed by setting a plan to protect both them and ourselves.
What would you and your family do without your income? My spouse and I both work, and we don’t have kids, so we probably could make ends meet on one income, but that is not true for many. If you are single, your ‘backup’ income is your emergency fund. This is why having 3-6 months for emergencies is so important. If you are single, or only have one income in the family, and no emergency fund, you are at high risk and need a disability solution immediately.
Your emergency fund should be your first line of defense. In general, you want 3-6 months of your expenses in a fully funded emergency fund. Those expenses have to include all of your Musts, but you will be happier if it includes your Shoulds (more on Musts vs Shoulds here). Your emergency fund should be in a simple, High Yield Savings Account (HYSA) as it has a job (and does not need to be risked in investments). Its job is to be there when you need it, such as with a disability.
If you don’t have a fully funded emergency fund, you need to make sure you have Short Term Disability (STD) insurance. You can often get short term disability insurance from your employer, and it kicks in somewhere between one and fourteen days after your disability. STD typically covers 40-60 percent of your salary. The intent is for short term disability to bridge between your sick time/paid time off, and when long term disability kicks in. If you are comfortable using your emergency fund, you may be able to skip short term disability and save on the premiums.
Long Term Disability (LTD) is what people think of as disability insurance. It normally covers 60-70% of your income, and may last until you are retired, 70, or some other term. The bonus is that if you pay for the disability insurance yourself, it can generally be exclude from income taxes ( https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds/life-insurance-disability-insurance-proceeds-1 ). Effectively, disability that covers 70% will end up in a similar take home amount.
With Long Term Disability, you need to look at the terms. You will have to be disabled for 90-180 days depending on the disability and your plan. Of note is the difference between “own-occupation” and “any-occupation” disability coverage. If you are a surgeon, and have own-occupation coverage, then you will be disabled until you can do your trained occupation again (being a surgeon). The same surgeon who has any-occupation coverage may not be considered disabled if they could work as a telemarketer with their disability.
If you want help looking at how insurance fits into your financial plan, I offer a no-cost 60-minute introductory meeting at https://calendly.com/coachdrjay/childfree I do not sell insurance, I am an Advice-Only, Fee-Only, Fiduciary, CERTIFIED FINANCIAL PLANNER™ and Childfree Wealth Specialist and happy to help.
For more about insurance, check out this chat I had with Cody of Childfree Family.