What Young Professionals Need to Know About Disability Insurance

Insurance Insights
disability insurance

According to a recent study by Hartford Financial Services Group, only 45% of young professionals across the country have any form of short-term disability insurance and even worse, only 39% have any form of long-term disability insurance.

Now you are probably thinking like many, “Why would I need disability insurance? I’m young!”

As busy and active young professionals, it can be easy to fall into the trap of thinking that because we might be young and healthy today, the future will follow the same trajectory. When in fact, the Social Security Administration estimates that nearly one in four young workers will become disabled at some point prior to age 65.

Today’s post is not intended to be doom and gloom, but rather to stress the importance of putting the appropriate protections in place now to help you remain independent well into the future. We’ll walk through the differences between short-term and long-term policies and the various aspects of each that you should consider before buying.

Protect Against Short-term Disabilities

Short-term disability policies are designed to protect you in the event you become injured or ill for several weeks–or even months–but usually no longer than a year. Typically there is an elimination period which is the number of days you have to be sick or injured before your policy will begin to pay you benefits, which can range from 50% to 70% of your salary during that payout period.

Think of the elimination period as a type of deductible in that the insurance company wants you to have some skin in the game before they will begin to pay benefits. Elimination periods can vary, but usually range from one day to 30 days and oftentimes people will utilize sick days or accrued vacation days to bridge the short gap before a policy kicks in. This is another great example of why an emergency savings account is critical, as it can help serve as a buffer during a short-term disability elimination period.

As part of a comprehensive benefits package, many employers offer short-term disability insurance and typically these policies will be less expensive than if you were to purchase them independently.  On top of the cost savings associated with employer sponsored insurance, most employers can deduct the cost of the insurance directly from your paycheck, making the whole process fairly simple.

Don’t Overlook Long-term Disability Insurance

Long-term disability policies are similar in nature to short-term policies, but typically have longer elimination periods and will usually pay out benefits until a certain age. Long-term policies can range in what they pay out, but frequently policies will cover 40% to 70% of income, oftentimes until age 65. Be sure to double check the length of your policy as the length can vary greatly.

If purchased through your employer, the elimination periods on long-term policies will frequently match up to the length of coverage for short-term policies, but be sure to double check that there aren’t any gaps in your coverage. For example, an employer might offer a short-term policy that covers an individual for 90 days, then a long-term policy that kicks in after 90 days.

You will also notice that virtually no policies will cover up to 100% of your income and this is very much by design. Insurance companies want to incentivize individuals to go back to work, so they tend to only insure up to about 70% of an individual’s income.

Read the Fine Print and Know the Details

When it comes to insurance policies nothing is created equal which makes it so important to know all of the moving pieces of your policies. Likely one of the most important details to fully understand is how the policy defines you being “disabled.” There are two primary definitions of being disabled when it comes to insurance:

  1. Own – You are considered disabled if you are unable to perform the activities of your “own” occupation.
  2. Any – You are considered disabled if you are unable to perform the activities of “any” occupation.

As you can see this is a fairly substantial distinction and one that becomes even more critical for those young professionals with highly trained backgrounds and a very specific skillset that might have led to a fairly substantial earnings capacity (i.e. attorney, engineer). If for example, your policy used an “any” definition, the attorney would not be considered disabled if they could work in a call center.

One last thing to be aware of is how your benefits will be taxed, which is most relevant when looking at employer sponsored disability plans. In short, if you or your employer pays for a policy with pre-tax dollars, then any benefits paid to you upon a disability will be taxable. Conversely, if you or your employer pay for benefits with after-tax dollars then your benefits upon receipt will be tax-free.

A Checklist of Questions to Get Answered

The important thing before getting any type of disability coverage is to know the right questions to ask and to get appropriate answers so you can compare apples to apples when shopping around for policies. Below is a list of questions to get answered as you do your disability insurance homework.

  • Does my employer offer short-term disability coverage? Long-term disability coverage? If so, start there, as that will oftentimes be the cheapest.
  • If my employer offers coverage, do they pay for it or am I required to pay?
  • What is the elimination period (important for both short-term and long-term policies)?
  • What percentage of my income will the policy replace and for how long?
  • How does the policy define “disabled”? Does the definition change over time (i.e. split definition)?
  • Will my benefits be paid pre-tax or post-tax?

Lastly, if you ever have questions please don’t hesitate to send us a note, shoot us a Tweet–or schedule a free 30-minute consult (see green box below) to discuss! We’re always happy to help.

About Matt Cosgriff, CFP(®)

Minneapolis Financial Planner | Intrapreneur | Young Professional | Millennial Guru | Tech Aficionado | Traveler | Food Lover | Minnesota Wild Fan | Movie Quoter | Follow on Twitter| LinkedIn

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