Certified financial planner Sophia Bera says that when it comes to insurance, “we often overlook our most valuable asset: our ability to work.”
And how do we protect it?
With disability insurance.
“Many times people in their 20s and 30s figure that they’re healthy and they choose not to elect disability coverage,” Bera writes in her upcoming book “What You Should Have Learned About Money, But Never Did.” “In my opinion, this is a huge mistake.”
According to an estimate by The Social Security Administration, one in three Americans coming into the workforce today will become disabled at some point in their career.
And if you think workers’ compensation will save you, you’re wrong. Close to 90% of disabilities are not covered by workers’ compensation because even though they remove a person from the workforce, they aren’t specifically work-related.
Bera, who is also the founder of Gen Y Planning, explains that there are two options when it comes to disability insurance: short term and long term.
Short term disability insurance “would be used if you were out of work for several weeks or months due to injury or illness,” whereas the average duration of long term disability insurance is 2.5 years.
Both of these insurances pay you a percentage of your salary until you can go back to work. Short term disability insurance pays you anywhere from 50-70% of your salary and usually lasts 3-6 months, while long term pays you 40-65% of your salary.
Even if you have coverage through your job, it still might not be enough — especially, Bera writes, if you’re the primary income provider for your family, or you’re supporting children or dependents.
Bera points out that many employers offer short term disability insurance as part of their company benefits package, and some employers offer group long term disability insurance. Although going through your employer for disability insurance is usually cheaper, the author cautions that employers don’t always offer the most comprehensive plan out there.
If your company doesn’t offer short-term disability, it’s possible to “self-insure” by saving and building up assets that you could access if need be. However, if your company doesn’t provide long-term disability insurance, or if you think you need additional coverage, then start by talking to a fee-only CFP® who can analyse your insurance needs and then send you to a trusted insurance agent in your area.
If you do choose to err on the side of coverage, Bera says individual plans offer more flexibility — but it does come at a cost.
Individual policies give you many more options in terms of elimination period, benefit period, and optional protection plans such as critical illness or hospital confinement.
However, buying your own individual policy can be expensive, so you may be better off building a robust emergency fund to save your money instead.
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