Disability Insurance – Protecting Families and Businesses from Disaster

Cameron Hamilton

According to the Social Security Administration, just over 1 in 4 of today’s 20-year-olds will become disabled before reaching retirement age¹.  With such high odds of experiencing a disability for some period of time, it is clear that financial plans should consider ways to limit the financial impact of disability.  After all, when someone becomes disabled, their income stops but their expenses continue and even rise.  Without income protection, everyday expenses and care can eat through savings and into retirement plans, a financial worst-case scenario.  Today’s Athenuem will discuss disability insurance and its role in limiting these negative outcomes.

Most breadwinners have some special skill or training that helps them earn their income.  Although most American workers are covered for disability by Social Security, this program requires you be disabled from all work for over twelve months.  Even then, benefits are based on earnings history and have maximum amounts much lower than privately available disability policies.  Thus, any skilled worker who could lose substantial earning potential through disability should consider private disability insurance, either through their employer or individually.  These policies will often cover up to 60-70% of earnings.  If premiums are paid by the individual, which we recommend, benefits are tax-free, meaning this coverage can come very close to replacing after-tax earnings.

Not all disability policies are created equal.  Each insurance company has their own policy language and when it comes to paying benefits, the policy language is king.  There are a few features we prioritize².  Policies should be guaranteed renewable, which means as long as premiums are paid, coverage must continue each year.  Ideally they go one step further and are non-cancellable, which means premiums cannot rise, even if the company was charging too little to cover claims for an entire age group.  Finally, there should be some own-occupation language if needed.  For example, a surgeon could become disabled from performing cases but could still earn less as a lecturer.  This feature comes in different names and forms across carriers and is often the key differentiator in terms of premium cost and potential benefits.

While most seek disability insurance to protect their family from loss of income, it can also be helpful for businesses.  If the loss of a key employee would substantially limit the outlook for a business, disability insurance can replace revenue during recovery or help defray the costs of finding and training a replacement.  It could also be used to fund a buy-sell agreement in the event of disability of the owner, protecting both the survival of the business and therefore the financial interests of the owner’s family.

When we speak with our clients, none count becoming disabled as a milepost on their ideal financial map.  Nonetheless, planning for the risk of a disability, through personal savings or with insurance, should be part of the conversation.  If you are unsure whether your financial plan could sustain a loss of income, we’re happy to help analyze your options.

  1. Social Security Administration 2017 Basic Fact Sheet
  2. This list is non-exhaustive and features should be chosen on an individual basis.
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