According to the Social Security Administration, a 20-year-old has more than a 25% chance of becoming disabled before reaching retirement age.1
Loss of income for such a duration has the potential to cause significant financial hardship. And while Social Security Disability Insurance may help, it’s critical to understand that about two-thirds of initial applications are denied and the average SSDI payment is only $1,534 a month.2,3
Your employer may offer disability coverage and could pay all or part of the coverage cost.
Employer plans typically cover 50% to 60% of your income. This limited coverage might not be enough to meet your bills, which is why you may want to supplement employer-based coverage with a personal policy. Supplemental policies may be purchased to cover up to about 70% of your income.4
Taxation of Disability Benefits
When you purchase a personal disability policy, you receive benefit payments structured to be income tax-free. Consequently, you may not be eligible for coverage that equals your current salary since your take-home pay is always less.
If your employer covers your insurance, you will generally have to pay taxes on the income you receive. If you contribute to the cost of employer-provided coverage, you will receive a pro rata amount of the benefits as tax-free income.
Choices, Choices, Choices
Consider the waiting period before disability payments begin. A longer waiting period saves you money, but it also means that you may have to live off your savings for a longer period. You are the best judge of how much of this risk you are comfortable assuming.
You also may want to coordinate the waiting period with any short-term disability benefits you could have. For example, if your short-term disability covers you for 90 days, look to have at least a 90-day waiting period so that you can potentially lower the cost of the long-term policy.
Ask how a policy defines an inability to work. Some policies will say “the inability to do any job or task;” others will say “own occupation.” You may prefer the latter definition so you’re not forced to perform some less-skilled, lower-paid work. That type of work may not help you meet your bills.