Disability Insurance

Disability insurance provides income replacement if you are unable to work due to a physical or mental health condition. It is often categorized as short-term disability (STD), which typically covers the first 3 to 6 months of disability, and long-term disability (LTD), which begins after the short-term benefit expires and may continue for years, decades, or until retirement age, depending on the policy.

According to the Social Security Administration, more than one in four 20-year-olds will become disabled before reaching retirement age. Despite this statistic, disability insurance is frequently overlooked in financial planning. Many people insure their home, car, and life but fail to insure their most valuable asset: their ability to earn income.

Employer-provided group disability coverage is common but may have limitations. Group LTD policies typically replace 50% to 60% of base salary and may not cover bonuses, commissions, or self-employment income. Benefits from employer-paid policies are taxable as income, which effectively reduces the replacement rate further. Group policies may also have more restrictive definitions of disability, shorter benefit periods, or offsets for other income sources like Social Security disability benefits.

Individual disability insurance policies, purchased privately, offer more customization. You can select the benefit amount, waiting period (elimination period), benefit duration, and definition of disability. "Own occupation" coverage, which pays benefits if you cannot perform your specific job, provides broader protection than "any occupation" coverage, which only pays if you cannot work in any job. Individual policy premiums are not tax-deductible, but the benefits are received tax-free, which is an important distinction.

For self-employed individuals and business owners, disability insurance is especially important because there is no employer to provide group coverage, and the loss of the owner's ability to work often means the loss of the business's income. Business overhead expense (BOE) disability insurance is a separate product designed to cover business expenses like rent, utilities, and employee salaries while the owner is disabled.

The ideal time to purchase disability insurance is while you are healthy and employed, as medical conditions can make coverage more expensive or unavailable. Premiums are based on age, health, occupation, benefit amount, and policy features, so securing coverage earlier generally means lower premiums.