In a word – absolutely! Most of us find it pretty easy to block out the possibility of ever becoming disabled to the point of not being able to work any more. That’s easy enough to do when you’re completely healthy. But like so many other disasters of life, a disabling injury or illness can come like a thief in the night. Being prepared in advance – by have disability insurance of your own – is the only reasonable strategy. There’s no do-over if you don’t.
Let’s consider some of the reasons why you need disability insurance.
How Will You Survive if You Can No Longer Work?
Most household budgets are stretched pretty tightly even if you are fully employed. But how will that budget look if you or your spouse were to lose your job?
The initial thought may be that you cut back on your cost of living enough that you can live on whatever income you have coming into the household. But you can only cut so much, and then you need to find an additional income source.
Your Savings Will Disappear Quickly Without a Steady Paycheck
Let’s say that you have a full year’s worth of living expenses in your emergency fund. That means that if you are ever disabled everything will be fine for the first 12 months. But what happens if your disability runs beyond one year, or if it’s permanent?
Once your emergency fund is gone, you’ll need to begin tapping into long-term savings, or taking on new debt. Either strategy will compromise your future financial security.
And a not so funny thing happens whenever an income disappears – expenses rise. This is to be completely expected since the factors that caused your disability will almost certainly result in mounting medical bills.
No matter how much savings you have, it will be exhausted if your disability runs long enough.
It Could Take a Long Time to Get Social Security Disability – and it May Not Pay that Much
If you are facing long-term or permanent disability you can apply for Social Security disability benefits. But those aren’t the easiest benefits to get, and it can often take months or even years before your claim is finally approved. What will you do in the meantime?
Still another issue with Social Security disability is the level of compensation. The average monthly benefit from Social Security Disability is just $1,165 as of August, 2015.
That will be a welcome benefit, but it will hardly replace your income, particularly if that income was well above the benefit you’ll get from Social Security.
What if you have an employer sponsored disability policy?
Your Employer Provided Disability Policy Has Serious Limits
Many people mistakenly believe that an employer provided disability policy has them covered in the event that they can no longer work. Unfortunately, that’s only partially true in most cases.
Employer sponsored disability policies come with strict limits. With most such policies, the monthly benefit will replace no more than 60% of your salary. And at that, the monthly benefit may be limited to a certain threshold, like $5,000. That will do you little good if your income is well in excess of $100,000 per year.
Worse, many employer policies base the disability benefit strictly on your base salary. That means that income from commissions and bonuses will be excluded. But if that represents a significant percentage of your regular monthly income, you will find it even more difficult to survive on an employer policy alone.
Benefits from an Employer Paid Policy Are Taxable
This is a point that trips up a lot of people. After all, benefits paid from health insurance, life insurance, and auto insurance policies are generally not taxable. But benefits paid from an employer sponsored disability policy usually are.
This is because the plan is designed to replace lost income, and is generally paid entirely by your employer. That means that any benefits you receive will be taxable to you in the year received. This will further reduce whatever benefit you receive from the disability plan, as well as facing the possibility of paying a large chunk of money when it comes time to file your income tax return.
If you have your own disability policy, the benefits will not be taxable as you will be paying the premiums yourself.
An Employer Disability Policy is NOT Portable
The day will almost certainly come when you will leave your current job. And when you do, you’ll also be leaving your employer disability policy behind.
Now there’s a chance that the next employer you will go to will also provide a disability policy for you. But there’s at least an equal chance that that will not be the case.
Many employers, in an effort to cut payroll expenses, are cutting back or eliminating certain benefits. Disability is often high on that list. Since employees are usually much more concerned with other benefits, such as health insurance, retirement, and paid time off, they may not even pay attention to missing disability coverage.
Then there’s always the possibility that your separation from your current job could result in an extended period of unemployment. Unfortunately, unemployment benefits will end if you are unable to work due to disability. Should you become disabled while you’re unemployed, your only choice will be to apply for Social Security disability. That will do nothing to solve your short-term income problem.
There’s also the possibility that you may become self-employed after leaving your current job. You’ll have an even greater need for disability insurance if you are self-employed, then you do when you are employed.
For all these reasons, you should seriously investigate setting up your own disability policy.
