Disability Insurance

Disability insurance is a product intended to protect against loss of income due to disability and/or illness. While life insurance is designed to replace future income for loved ones in the event of your untimely demise, disability insurance is designed to support you (and potentially those loved ones) in the event that you can no longer work for necessary income.

There are several things to consider when looking at disability insurance. How specialized is your current job? How large of a benefit are you looking for? How financial stable are you right now? What are the types of things that can knock you out of work for an extended period of time? What kind of premiums can fit comfortably in your budget?

Like any insurance out there, we are hoping to never actually use it. That said, this one is extremely important to understand since none of us want to lay our financial burden on family and loved ones. When considering benefits, it’s important to have a clear vision of what you’ll need in the event you can no longer provide income.

SSDI is a federal program that provides financial assistance to Americans that have lost their income due to disability. Those that are qualified to receive benefit must have previously paid into the program and accumulated enough credits to be eligible. On top of that, the condition must meet Social Security’s definition of disability and keep you out of work of any kind for one year or longer. All the specific information for qualifying for SSDI can be found at ssa.gov.

SSDI benefits are not paid for partial disability or short-term disability, this is a cushion for those that suffered a severe disability or illness that prevents them from creating a survivable income for the long term. The actual benefit will vary from person to person depending on the income, but generally the maximum benefit will range between $1,000 – $2,000 per month. For most, this is not enough to sustain a comfortable living (before we even factor in medical costs for the disability), so it makes sense to consider private disability insurance as an extra buffer.

For many W-2 workers, some form of disability insurance might already be covered by their employer. Generally speaking, private disability insurance will usually cover 50% – 70% of one’s current income. This will work in conjunction with SSDI, meaning the pay from the insurance company might be less depending on your federal benefit. It’s worth contacting HR to see exactly what your coverage entails under the categories of short-term disability insurance and long-term disability insurance.

Short-Term Disability Insurance (STDI)

STDI benefits will usually kick in shortly after the event that caused the disability and are generally only utilized for absences up to one year. During the time of the absence the beneficiary would be paid a portion of their income until they are cleared to come back to work. For example, a construction worker may break their leg deeming them unfit to work on the jobsite. Their STDI may provide a benefit of 60% of their income for two months till they get the cast off and are medically cleared for physical activity again.

Each plan is going to have different types of coverage, but some of the qualified reasons to utilize STDI may include (but not limited to):

• Recovery from medical procedures
• Complications with pregnancy & childbirth
• Major personal injuries
• Mental health conditions
• Care for family member undergoing serious health conditions
• Qualifying military contingencies (for example: family member gets called to serve, and leave is needed to deal with issues due to their absence)

The point of STDI is to cover you in the case of a situation that will prevent you from working for a temporary period of time. Many companies will offer maternity or paternity leave for newborns or newly adopted children; this is a separate benefit altogether.

Long Term Disability Insurance (LTDI)

LTDI is intended to provide a portion of your current income for the remainder of your working years till retirement age (usually 65) or death. One of the kickers here is that it may take up to 6 months (or even longer!) to start receiving this benefit. Remember when I mentioned that a Savvy Solo should aim for 6–9-month emergency fund? This is why! Of course, there are ways to swing STDI into LTDI, but it’s still best to have that cash cushion in the case of any delayed payments.

The point of LTDI is to provide income in many of the worst-case scenarios you can come up with. Instead of the above example of a construction worker, maybe instead of breaking his leg he got permanently paralyzed. 😬 Or think about an office worker who got into a car accident and suffered permanent brain injuries, which gives her constant motion sickness and migraines from sensitivity to light. 🙈

Again, each plan is going to have different coverage, but some of the more common qualifying reasons for LTDI include (but aren’t limited to):

• Musculoskeletal Disorders
• Cancer
• Heart Disease
• Permanent physical injuries considered necessary for the job
• Certain mental health conditions
• Neurological Disorders
• Advanced diabetes complications
• Just can’t deal anymore (JK, you aren’t going to get away with this one 🤪)

W-2 workers that are automatically enrolled in LTDI may have the option to “buy up” their coverage, say from 50% of annual pay to 65% for minimal cost. For those that don’t get LTDI as an automatic part of their benefits package (or are self-employed), it typically costs 1-3% of the annual salary. Either way, this is a small cost to ensure continued income while enduring these worst-case scenarios.

Unlike life insurance, some form of long-term disability insurance is absolutely needed for anyone (Savvy Solo or otherwise) who is not completely financially independent yet. Sure, in the event of one of these horrific events, you may have family and loved ones who would take you in. But do you really want to put that burden on them? I don’t either.

The good news here is that once you hit your FI number, the need for this insurance falls substantially. You might decide to drop the coverage altogether at that point! All the more motivation to keep saving and investing! 😎 Side note, you may want to consider keeping LTDI regardless of your FI status depending on your health insurance and medical history. Medical costs seem to keep rising, and (depending on the disability) there’s no telling what may be required to come out of pocket.

Here’s a few SDB tips when shopping for LTDI:

1. Check your current disability insurance through your employer. It will most likely be cheaper to “buy up” on your existing plan if you want more coverage because of the group rate. For those without disability insurance, read on!
2. Sign up for LTDI now while you are healthy. Pre-existing conditions will either significantly raise premiums or be negated entirely from the policy.
3. Go for a benefit period that ends at retirement age (62-65); this way social security benefits kick in when this benefit ends. The high premiums on policies that include lifetime benefits are unnecessary.
4. Knowing your Needs vs. Wants is important here. If you can live a comfortable modest life (with food, water, shelter, community) on 40% of your income, consider the smaller level of coverage for the smaller premiums. The opposite is true if fixed costs are a high % of your income.
5. Choose a longer elimination period. Policies that have a 30-day time frame to start paying the benefit will have much larger premiums than those that have a 180-day elimination period. What’s a few months when looking at a 20–30-year timeframe? Build that emergency fund!

While life insurance will benefit only a portion of Savvy Solos, disability insurance will benefit the vast majority! Personally, I’m lucky as hell. I come from a huge family, and plenty of them would be willing to help out should I fall on the worst of times and survive. That said, it’s none of their actual responsibility to do so, and I don’t want to treat it as such.

I’m also lucky in the sense that my W-2 job has disability insurance as part of the benefit package. I’m comfortable with the coverage, so there’s no sense in trying to get additional insurance from an outside provider. That said, if something about this coverage changes, I would be comparing LTDI policies from private companies tomorrow.

Don’t wait until the worst happens on this one. Best to have it and not need it, then need it and not have it. 😱

Stay classy Solos! ✌️