The Social Security Disability Insurance program is projected to pay out approximately $133 billion in benefits this year. With new applicants each year, the system is expected to exhaust its reserves at the end of 2035 if changes aren’t made.1,2
Qualifying for benefits requires that applicants prove their disability is so severe that it prevents them from engaging in any type of meaningful work at all, and that the disability is expected to last for at least 12 months or result in their death. Rather than depending on a government program to protect their income in the event of a disability, many individuals prefer to protect themselves with personal disability insurance.
Disability insurance provides protection by replacing a portion of your income, usually between 50 percent and 70 percent, if you become disabled as a result of an injury or illness. This type of insurance often has a two-fold benefit since a disability can prevent you from working while at the same time saddling you with unexpected medical expenses.
Unlike Social Security Disability Insurance, with a private disability policy you can choose a definition of disability that only requires the applicant demonstrate that they can no longer continue in the same line of work (often referred to as an ‘own-occupation’ definition of disability). This is particularly important if you work in a highly specialized field and are well compensated for doing so; while you may be able to work in another field if you become disabled, this would likely require a significant loss of income.
In addition to the definition of disability offered in the policy, it is also important to evaluate the elimination and benefit periods. The elimination period is the number of days you will wait after becoming disabled before receiving benefits; the benefit period is how long those benefits will continue to be paid. Since coverage is designed to replace income, most people choose to purchase protection only during their working years.
Many people think of workers compensation as a disability safety net. But workers compensation pays benefits only to individuals who become disabled while at work. Even with workers compensation, each state makes its own rules about payment and benefits, so coverage may vary considerably.
If you become disabled, personal disability insurance can be structured to pay a benefit weekly or monthly. And benefits are not taxable, if you have paid the premiums in full.4
When you purchase a policy, you may be able to tailor coverage to suit your needs. For example, you might be able to adjust benefits or elimination periods. Some policies also offer partial disability coverage, cost-of-living adjustments, residual benefits, survivor benefits, and pension supplements.
If you have questions about disability insurance, your current DI policy, or think you may need additional coverage do not hesitate to reach out to us!
1. Social Security Administration, 2020
2. Barron’s.com, 2019
Disability insurance is issued by participating insurance companies. Not all policy types and product features are available in all states. Any obligations are dependent on the ability of the issuing insurance company to continue making claim payments.
The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Federal and state laws and regulations are subject to change, which would have an impact on after-tax investment returns. Please consult a professional with legal or tax experience for specific information regarding your individual situation.