Preparing for the unexpected: Disability risk
Imagine you were in an accident or got sick and needed a few weeks or months (or even years) for your recovery. If you couldn’t work, how would you cover your expenses? An emergency fund may help protect you for a short time, but some issues could last longer. Though the risk of a disability may seem unlikely, it’s important to consider how a potential disability could impact you, your family and your financial goals.
How likely is a disability?
About 1 in 4 workers will experience a disability lasting longer than 90 days during their working years1, but several factors could affect your chances of having a disability, including:
- Occupation — More labor-intensive professions have a greater chance of causing a disability.
- Age — The likelihood of a 50-year-old being diagnosed with a disability is nearly twice as high as that of a 30-year-old.
- Gender — Women are more likely than men to experience a disability in their working years.
- Lifestyle — Unhealthy behaviors, such as smoking, can increase your chances of experiencing a disability.
Short-term disability
Disabilities can be caused by an injury or illness and are categorized as either short or long term. Short-term disabilities typically last fewer than six months and are much more likely. They include situations you may not associate with disability, like recovery after a surgery or injury and pregnancy/birth. Individual short-term disability coverage can be expensive, and many employers don’t offer enough paid time off for these events, creating a potentially significant risk for workers (and their families) who depend on their income.
For this reason, we recommend everyone have a plan in place for a short-term disability that could last six months.
To cover this need, we recommend trying to replace 100% of your after-tax income, which can help cover your necessary expenses and any additional medical costs that could arise. Your plan could include self-funding (where you use paid sick leave and emergency savings), short-term group disability benefits or a combination of both as outlined below.
Short-term disability insurance considerations
| Do you have access to short-term group coverage? | Do you have a fully funded emergency savings? | Our guidance |
|---|---|---|
| No | No | Target the higher end of our emergency savings range, which is six months of total expenses. |
| Yes | No | It’s likely worth electing coverage to cover the gap. |
| Yes | Yes | It may still be worthwhile to obtain group coverage if:
|
Long-term disability
While a disability that lasts longer than six months is less common, it’s far more financially harmful. Options for protection are typically limited to insurance. Similar to a short-term disability, we recommend trying to replace as much of your after-tax income as possible. This level of protection will allow you to continue to meet the majority of your income and savings needs.
Typically, you can expect premiums for long-term disability income insurance policies to cost 1%–3% of your annual gross income. This means if your gross income is $100,000, premiums are generally $1,000–$3,000 per year.
People usually get disability insurance, either through their employer (known as group coverage) or an individual plan. If you’re relying on group coverage, keep in mind that if you don’t enroll when first eligible, pre-existing conditions could impact your ability to receive coverage in the future.
Look for coverage that uses an own occupation definition of disability and replaces as much of your after-tax income as possible until your planned retirement age. If your employer-offered insurance doesn't meet that criteria or the premiums are expensive, a financial advisor may be able to help you find an individual policy that's a better fit.
Additionally, it’s important to understand what happens to your benefit should you leave your employer. If you can’t keep your coverage, we generally recommend an individual policy to help ensure you’ll have protection, even if you lose your job.
Workers’ compensation provides benefits for medical expenses, lost wages and funeral costs in the event you become injured at work. There are many things that can cause disability that aren’t covered by workers’ compensation, which is why we don’t recommend relying solely on it for long-term disability protection.
The Social Security Disability Insurance (SSDI) program can provide disability benefits, but you must have a qualifying work history and meet their strict definition of disability. Because many work-limiting disabilities won’t meet that definition, we don’t recommend relying solely on SSDI for long-term disability protection.
Business owner considerations
Business owners can be impacted not only by their own personal disabilities, but by an employee's disability as well. Of course, you can provide group benefits to your employees, but certain disability policies can help cover other aspects of your business. Examples include:
- Overhead expense — Provides short-term funding of day-to-day expenses if you become disabled.
- Key person — Provides benefits to the business if a key employee becomes disabled.
- Buy-out — Provides benefits to pay for the disabled employee’s share of the business.
Next steps
Overall, it’s important to consider the impact a disability could have on your financial goals. Fortunately, there are ways to protect against a short- and long-term disability. Based on your personal situation, your financial advisor can develop a plan that will help protect your financial goals should you be faced with a disability.
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1 https://www.soa.org/resources/experience-studies/2013/idi-valuation-table/