An often overlooked but key area of your overall protection strategy is the need to protect your income stream if you are unable to work due to illness or injury. Think about the financial impact if you were unable to earn a paycheck for an extended period.
Disability income insurance is designed to protect against that risk but is a type of insurance many aren’t familiar with. Here are answers to many questions we frequently hear from clients:
Q: What is the chance I might be subject to a disability-related event?
A: It may be more likely than you think. It is estimated that more than one in four of today’s 20-year-olds will miss at least a year of work because of a disabling condition before they reach retirement age1.
Q: What if I don’t work in a high-risk occupation?
A: The fact is that injuries can happen anywhere, not just on the job. An injury could result from a car accident, a bad fall, a mishap working around the yard or even a sport. Then, there are more debilitating illnesses. COVID-19 reminded us all of our vulnerability and that some illnesses have debilitating effects for an extended period.
Q: What can disability income insurance do for me?
A: Disability income insurance provides a source of monthly income to replace what is lost if you are unable to work. This is important to help pay for your household expenses on an ongoing basis. Funds can also help you keep pace with savings for monumental goals in your life such as retirement or your child’s college education.
Q: Do I really need disability income insurance? What about the financial support from my occupation or the Social Security disability program?
A: Employer-provided policies, if offered, often pay the equivalent of about half your salary, but these benefits are generally subject to income tax, leaving you with a gap to bridge to meet your needs. Social Security benefits are not always easy to qualify for, may take months before payments are approved and often pay only a modest amount (the average monthly benefit is $1,2341). These two options leave large gaps for most people.
Q: What financial support would I receive from a disability income policy I purchase?
A: Disability income insurance will typically pay in the range of 60 percent of your income, depending on how your policy is structured. Premiums are paid with after-tax dollars, so the benefits will not be taxable. On an after-tax basis, the disability income benefit should come very close to matching your regular income from work.
Q: Will a disability income insurance policy protect me if I can’t work in my specific field or if I can’t work at all?
A: This depends on the type of policy you choose. With an “own occupation” policy, you can collect benefits if you are unable to work at your regular occupation. With an “any occupation” policy, you are only eligible to collect benefits if you can’t work at all.
Q: How soon do benefits begin?
A: This also depends on how your policy is structured. Policies come with an elimination period, ranging from 30 days to 180 days. This is similar to a deductible on your auto insurance. For example, if you have a 60-day elimination period, you won’t receive benefits for the first two months you are disabled. A longer elimination period will lower the cost of your policy but widen the income gap you will need to be prepared to fill.
Learn more today.
Disability income insurance should be included in a review of your overall protection needs. Consider talking to your financial advisor or insurance specialist about what it can do for you.
1Social Security Administration, “The Faces and Facts of Disability.”
Phil Decallejon, CFA®, is a Financial Advisor with Orchard Financial Group, a private wealth advisory practice of Ameriprise Financial Services, LLC. in Los Angeles, CA. He specializes in fee-based financial planning and asset management strategies and has been in practice for 8 years.
To contact him: https://www.ameripriseadvisors.com/phil.decallejon/ | OrchardFinancialGroup@ampf.com | (310) 582-3500 | 12400 Wilshire Boulevard, Suite 1210, Los Angeles, CA 90025
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