“Death is a certainty – disability is a random chance which most people try to ignore. Yet your chances of suffering a disability before age 65 are greater than your chances of dying before age 65,” writes Janet Freedman in her book Hit by an Iceberg: Coping with Disability in Mid-Career. It sounds a little fatalistic, but the implications ring true: You never know what’s going to happen. It makes sense to be prepared for all of life’s eventualities. Enter disability insurance.
How prepared can we be for a disability?
There are physical, emotional and familial effects, which are difficult to control and prepare for.
As a result, we are going to focus on what we can control.
How much do you need, and where does it come from?
If your employer offers a paid leave policy or disability plan, you need to be aware of how long and how much coverage it provides.
Typically, this kind of plan will cover a percentage of your monthly income if you can’t work.
STD or LTD?
Generally, short-term disability insurance (STD) covers you for six months or less.
Long-term disability insurance (LTD) lasts for the length of your disability or until you retire.
To determine what kind and how much coverage you have, and whether that’s enough, you can contact your HR department or office manager.
The Bureau of Labor Statistics provides some guidelines in its February 2015 report, entitled “Disability insurance plans: Trends in employee access and employer costs:”
“Ninety-three percent of private industry workers are covered by a fixed-duration plan. The median length of coverage is 26 weeks. This is the same across occupational groups and has stayed mostly the same over time. The median salary replacement rate for short-term disability plans is 60 percent, a rate that has stayed roughly the same for many years. Among workers covered by a short-term disability insurance plan, 75 percent have a plan with a maximum benefit amount; among those with maximum payout provisions in the plan, the median amount that a worker would be eligible to receive was $584 in March 2014.”
For LTD, the report says:
“Long-term disability insurance plans also are typically a fixed percent of annual earnings. Among private industry workers covered by a long-term disability insurance plan, 95 percent had plans that cover a fixed percentage of annual earnings. The median amount covered by long-term plans is 60 percent of annual earnings. Most long-term plans (88 percent) have a maximum amount payable and the median maximum payout in 2014 was $8,000 per month.”
How Much Disability Insurance Do You Need?
What if your employer does not offer coverage in these ranges? What if they don’t offer coverage at all? Perhaps you are self-employed. These are all factors that may bring personal savings or investments into the discussion.
While this may seem like a viable plan in theory, the reality is that “Forty-six percent of adults say they either could not cover an emergency expense costing $400, or would cover it by selling something or borrowing money,” (May 2016: Federal Reserve Board Report on the Economic Well-Being of U.S. Households in 2015).
Furthermore, the report goes on to say that out of the 26% of survey respondents who experienced a “major unexpected medical expense that they had to pay out of pocket in the prior year,” 46% of those reported that they still carry some of that debt.
Which brings us to private disability insurance coverage and our initial question: How much should you get?
In “Six Frequently Asked Questions Concerning Disability Insurance” we wrote “A good rule of thumb is 70% coverage. As with all insurance needs, it depends on your circumstances and what you can afford.”
How Much Income Do You Need?
Rules of thumb aside, you have to assess how much income you need.
Can you sustain your standard of living if you bring in approximately 70% of your income?
If the answer is “no,” consult a qualified advisor to figure out what you can manage financially.
You may have to make some lifestyle changes, or obtain disability insurance that will cover what you need.
“Like an iceberg, disability is large and complex, with most of its reality hidden beneath the surface,” Freedman writes in her book. “The impact on individuals, family and friends, is enormous. The adaptations to it are often deep, far-reaching, and life-changing. Be prepared, then cope if a disability occurs.”
Prepare. Always good advice. Thanks Janet.