The Personal Need for Disability Insurance

Many individuals consider their home to be their most significant asset. However, for most of us, our greatest asset is our capacity to work and generate income. The inability to work – due to job termination or a disability that has taken away the capability to work – can often lead to financial ruin.
Everyone who earns a living is aware of the consequences of job loss. However, the likelihood of a serious incapacity is a risk that few take into account. What are the odds that you will become seriously incapacitated? According to a study, 30% of all Americans between the ages of 35 and 65 experienced an incapacity lasting at least 90 days.1 The risk is indeed real. The question then becomes, “How should you handle it?”

Don’t Rely on Social Security

A handful of individuals manage to qualify for incapacity benefits from Social Security. However, the Social Security definition of “incapacity” is so stringent that, in 2019, only 36.9% of initial claims for Social Security incapacity benefits were approved.2
Clearly, something beyond Social Security is required.

Group Disability Insurance

Many employers offer – or make accessible – disability insurance on a collective basis. However, even those who are covered by a group policy can still face considerable risk. Employer-sponsored disability policies rarely replace more than 60% of your monthly salary. Moreover, many policies have a monthly maximum benefit that may be significantly less than what some individuals earn. Income taxes can also be a concern; if the employer is bearing the full cost of the coverage, and not including it in the employee’s income, disability benefits are fully taxable. If an employee pays for disability insurance with after-tax dollars, the benefits are received tax-free.3

Individual Disability Income Insurance

If collective coverage is not accessible, the answer may be individual disability income insurance. Even though individual policies can cost more, as long as you pay the premiums with after-tax dollars, the benefits are tax-free. Plus, an individual policy enables you to adapt its terms to suit your personal needs. When shopping for an individual disability policy, consider the following:

Company strength: You need to determine and be confident the company is financially robust.

Definition of disability: Search for a policy that defines disability in the broadest terms achievable. Some policies will allow you to work in a different occupation and still collect incapacity benefits.

Elimination period: How long must you wait before disability payments commence?

Benefit period: How long will you need coverage? Both short-term and long-term
disability benefits are an option.

Inflation protection: Try to find a policy that adjusts benefits according to inflation.

The Consequences of Disability

While most Americans insure their lives and physical assets such as their homes, cars, etc., many neglect the need to safeguard their most precious asset – the ability to earn an income. How likely is it that someone will become incapacitated? The table below, developed using data gathered by the federal government, shows the number of working-age Americans who have a disability that affects their daily lives.

Individuals with Disabilities by Age4

Income Declines, Expenses Increase

The graph below illustrates the problem typically encountered by an individual who becomes incapacitated for an extended period – income decreases while expenses increase.

1Based upon the 1985 Commissioners’ Individual Disability Table.

2Annual Statistical Report on the Social Security Disability Insurance Program, 2021, November 2021. Table 61, Medical decisions at the initial adjudicative level, by year of application and program, all decisions.


3The discussion here concerns federal income tax law only. State or local law may vary.


4Source: U.S. Census Bureau, 2019 American Community Survey 1-Year Estimates, Sex-by-Age-by Disability Status for the civilian non-institutionalized population, male and female. Table B18101.

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