For many, a long-term disability would be financially devastating. Although no one likes to think about this possibility, you should consider your options now so that you can obtain disability income insurance if needed.
Many individuals can find the funds, even though it might be difficult, to get through a short-term disability of six months or less. Find out what benefits you would be entitled to under sick leave policies, short-term disability policies provided by your employer, and workers' compensation. Another source of funds might be your emergency fund of three to six months of living expenses.
When considering a long-term disability, assess your income needs until age 65, when presumably retirement benefits would begin. During this analysis, consider the following items:
-
Estimate your
monthly expenses
following a
disability.
Typically, some
of your
disability
benefits would
be free of
income taxes and
you won't incur
work-related
expenses.
However, don't
underestimate
your expenses,
since your
medical and
rehabilitation
expenses might
be much higher
after a
disability. Find
out if you would
continue to be
covered under
your employer's
health insurance
plan. If not,
you'll need to
make provisions
for that
expense.
-
Review your
annual Social
Security
Statement for an
estimate of
disability
benefits. The
Social Security
Administration
now mails annual
statements to
all workers aged
25 and older who
are not
currently
receiving
benefits.
However, keep in
mind that the
eligibility
requirements are
quite stringent
- you must be
totally
disabled, have
little or no
chance of
recovery, and
wait six months
or longer for
your first
check. Even if
you do qualify,
benefits tend to
be modest.
-
Decide what
personal
resources you
would want to
use. You can
access funds
from individual
retirement
accounts,
annuities, or
401(k) plans
without penalty
if you are
disabled and
meet the
requirements
under each plan.
But first
consider whether
you want to risk
depleting your
retirement fund
or children's
college fund due
to a long-term
disability.
-
Investigate any
long-term
disability
benefits
provided by your
employer.
Long-term group
disability plans
are less common
and typically
less generous
than short-term
plans. The
policies
frequently have
strict
definitions of
disability, pay
up to 60
percent of your
base salary
(bonuses and
commissions
generally aren't
included), pay
two to five
years of
benefits, and
don't provide
cost-of-living
increases. Also
factor in income
taxes that must
be paid on any
benefits your
employer paid
for. Check to
see if your
employer-sponsored
retirement plan
offers an option
for early
retirement in
case of
disability.
- Consider purchasing disability income insurance to help fill any gaps. However, you might not be able to protect more than 60 to 80 percent of your income through insurance, since insurers want you to have an incentive to return to work. Any benefits from policies you paid the premiums for are received income tax free. Coordinate your employer-provided insurance and your own policy so that the maximum benefits do not exceed the amount the insurance companies will pay. Otherwise, you may pay for coverage you won't receive.
