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Disability Insurance: Why You Need to Insure Your Income

You have insurance for your health, your home and your car. You may even have insurance for your mobile phone and your dog. But, if you’re like most people, you probably don’t have insurance to protect your greatest financial asset—your ability to make money.

The likelihood that you will suffer a disability that results in loss of income at some point during your career is 25%, according to a study done by the Council for Disability Awareness (CDA) in 2014.1 Yet nearly 60% of working adults do not have disability insurance. A disabling event could be something severe, such as a stroke or heart attack, or it could be a difficult pregnancy or debilitating back pain that renders you unable to work for an extended period of time.

This is especially important topic for women, because most of us don’t think we will become disabled, yet nearly 60% of long-term disability claims are filed by women, according to the CDA.

Unexpected income loss due to illness or injury can be devastating since you are also likely incurring medical debt at the same time. Plus, many studies have shown that more than half of Americans live paycheck to paycheck. According to a 2015 report from the Pew Charitable Trusts, 55% of households can’t cover one month of income from liquid savings.2 Keep in mind that the average long-term disability claim is almost three years.

The biggest reason people don’t pursue disability insurance is cost. In the CDA study, 33% of survey respondents said they couldn’t afford disability insurance. About 30% said they’d never thought about it and 24% said they didn’t know enough about the subject.

Even though people say they can’t afford it, many don’t know what the cost is, which is not surprising as premiums are determined by many different factors and can vary from person to person. Premiums can depend on a number of factors including whether the insurance is employer-sponsored or individual, or if it is short-term or long-term coverage.

Disability insurance can be hard to understand. Most policies will replace about 60% of your income, with premiums in the neighborhood of 1-3% of your annual income. This is a rough estimate because premiums can vary widely based on age, job, location, health, length of coverage, or the timeframe before collecting payments (the elimination period is usually from 60 days to one year). Generally, health isn’t a consideration if disability insurance is offered through an employer.

Furthermore, what constitutes a disability will also vary from policy to policy. Can you still work within your industry at the same level? Can you still work full-time? Can you work at all?

If you’re fortunate enough to have an employer that provides disability insurance for you, be sure to investigate the payout amount (most policies have monthly maximums, regardless of salary) and elimination period. You may want to look into supplemental insurance on your own. Generally, your insurance cannot replace more than 75% of your income. Also keep in mind that if your employer pays the premium, the payout benefit is taxable. But, if you pay the premium, the payout is tax-free and your policy stays with you from job to job.

To find out how to obtain disability insurance that is right for you, talk to an advisor at Jemma Financial today.

1. Consumer Disability Awareness Study, “America’s Income Protection Picture.” 2014.
2. The Pew Charitable Trusts, “The Precarious State of the Family Balance Sheet.” January 2015

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