As a mom, you want to be sure your family is protected, regardless of the circumstances. For this reason, you may have already purchased life insurance (check out our blog post on why life insurance is important). But have you considered the importance of disability insurance? The Social Security Administration cites that nationally speaking a 20-year-old has a 1-in-4 chance of becoming disabled before reaching retirement age1. Given this number, it is important for moms to consider disability insurance and make sure they and their loved ones are covered.
What is Disability Insurance?
Disability insurance is similar to life insurance, but instead of being triggered by a death, it is enacted by a disability. Now, you might be wondering “what is considered a disability?” Well, it depends. In this case, it depends on the type of policy you have and the type of disability that happens. Some policies will cover you if you cannot hold any occupation (think social security disability here where you are unable to hold any job even if it’s outside of your training or career path). Whereas, other policies will only cover you if you cannot hold your own occupation.
Here’s an example: a surgeon has a hand injury and can no longer carry out the duties of her position. If she has an “own occupation” disability insurance policy, she’s covered because she can no longer hold a position as a surgeon. If she has “any occupation” coverage and cannot be a surgeon but is not prohibited from working in another other position, let’s say as a receptionist, then her policy may not pay out due to her injury. As you can imagine, “own occupation” coverage is more expensive than “any occupation” because it is more likely that the insurance company will have to pay out on a claim. “Own occupation” policies do often require that they are connected to a specialized position and can be very costly.
Short-term vs. Long-term disability
Another feature of disability insurance you should be aware of is short-term vs.long-term insurance and coverages. As the name suggests, the key difference is the length of the period for which you’ll receive benefits from the policy. Short-term disability coverage usually starts immediately after you are claimed disabled and usually lasts between 3-6 months.
An important note for moms is that short-term disability policies sometimes cover maternity leave. Check the specifics of your policy to be sure.
If your emergency fund is sufficient to cover the short term of 3-6 months, then it is likely you will only need long-term disability insurance. If you don’t have an emergency fund, you should consider either starting one right away and funding it properly OR purchasing both short-term and long-term disability policies. (check out our blog post on starting with an emergency fund).
Taxable Benefits of Disability Policies
Finally, be sure you understand if your disability policy premiums are pre- or post-tax. If your premiums are pre-tax (you haven’t paid taxes on these dollars yet), your benefit will be taxable, and, if your premiums are taxed, your benefit will be tax-free. By paying the taxes on the premiums, you will have more cash flow coming into your household when you receive your premiums.
How to Buy Disability Insurance
Believe it or not, you may already have disability insurance without even knowing it. Some employers offer both disability and life insurance as a part of the basic employee benefit plan. Some employers will pay for these plans as a part of your benefits, which frequently offer minimal coverage. You can check with the company’s Human Resources representative to see if (and how) it is offered. Whether the company pays for the benefit or if the employee does, it’s important to know your options. Often it is something you must opt into. Some employers even extend this coverage to a spouse or partner of the employee.
If insurance is not offered through your employer, check with any professional organization that you or your partner are affiliated with; often, these groups sometimes offer group policies that may be available at a lower rate than purchasing individual policies.
You are now equipped with the right questions to ask when shopping for disability insurance from an agent. Be sure to ask:
- Does the policy have short- and/or long-term coverage?
- Is the policy “any occupation” or “own occupation”?
- Are the policy premiums pre- or post-tax?
Disability insurance is a key part of ensuring that your household is financially protected. It’s an important part of your overall financial plan.