Disability Insurance

  • An illness or disability might cut short your career and derail your assets and your income.
  • One way to protect against an interruption in earnings is through disability insurance.
  • It is important to think about your income needs in after-tax dollars.

Protection against income loss

The ability to earn an income is one of your greatest assets. It’s easy to take the ability to work for granted, or at least the certainty of your paycheck.

What would happen to your finances if you couldn’t work for an extended period of time? This could result from an extended illness or sudden accident. Being prepared for the unknown is essential to financial security. It’s important to ponder this particular “what if.”

One way to protect against an interruption in earnings is through disability insurance. It offers a way to replace lost income during a period of illness or disability. The coverage helps you meet expenses over the length of your disability – for months, years, or even the rest of your career.

Income replacement

Does your employer offer disability coverage as part of your benefit package?

Disability insurance can provide monthly payments for a portion of your monthly income. Policies typically don’t provide coverage for all of your income.

To calculate how much disability insurance you would need during an interruption in salary, consider all sources of income. Include your spouse’s wages and income from investments. Does your employer offer disability coverage as part of your benefit package? Be sure to include that benefit amount as well. It is important to think about your income needs in after-tax dollars.

You can supplement the amount of coverage you receive as a corporate benefit to help meet your income needs.

Two types of disability

Short-term disability coverage usually covers the first 3-6 months of disability. This policy can fill the gap until your long-term policy is triggered. A short-term policy may also cover leave for pregnancy or surgery.

Long-term disability coverage usually covers the period beginning at six months and continuing through age 65, if necessary. Some employers offer long-term disability coverage as a benefit.

Partial disability and “own occupation”

What if you are not ready to return to full-time work after the disability? Your disability policy may contain either a residual or partial disability provision that spells out what benefits you’ll receive if you can’t work full time.

What if you’re unable to work in the same job in which you have specialized skills and experience? The surgeon who cannot operate or the contractor who’s restricted physically may be forced to take a significant pay cut to work in a different capacity.

You can choose between “own occupation” coverage or “any occupation” coverage. Own occupation costs more than any occupation, but may be advisable to help protect higher income earners with specialized employment.

Infographic - Protection against income loss

Who should consider disability insurance?

Take a look at the income contribution of each wage earner in your household. What would the loss of one income mean to the household budget?

Disability can occur at any age or to either gender. In a study of their disability recipients, the insurance company Unum found 60% of long-term disability recipients over the 2009-2012 time period were women.1

Coverage is critical whenever you or others are dependent on your ability to earn a paycheck. It can be appropriate from the early years of your career through retirement. This is worth considering for all income earners even if one income is subsequently less in a two-income household.

Employer policies

Some employers offer group disability insurance coverage, whether they pay the premiums for you or you pay them out of your own pocket. Your employer’s program may offer benefits at a reasonable cost.

Be sure you understand and consider the costs and benefits of your employer’s short-term or long-term policies.

You can supplement the amount of coverage you receive as a corporate benefit to help meet your income needs.

Your Financial Advisor can help you determine how much disability insurance coverage you need based on your current and future income and expenses, as well as other sources of income and insurance.

Tax treatment

Your disability income is generally taxable if your employer pays the premium.

On the other hand, there is a tax advantage to paying the premium yourself. Should you become disabled, the payments you receive are income tax-free. If you were to receive 70% of your income without having to deduct taxes, you may find the amount to be similar to your normal take-home pay.

Financial strength of the insurance company

As you should with any insurance purchase, confirm the financial strength of the disability carrier.

Look for strong financial strength ratings from major independent rating agencies. In general, it’s a good idea to consider companies with an “A” rating or better.

Next steps

  • Calculate how much insurance you would need if you could not work.
  • Review any group insurance policies you may have through your employer.
  • Discuss your policies with your Financial Advisor to see how they might protect your overall financial goals.

1 “Five Myths About Disability Insurance”, Forbes, 9/24/13, Unum study of interviews with disability claimants, based on claims experience of 6 months or longer.

Wells Fargo Advisors is not a tax or legal advisor.

Insurance products are offered through nonbank insurance agency affiliates of Wells Fargo & Company and are underwritten by unaffiliated insurance companies.

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