You are a healthy active person, who tries to eat right, exercise, and doesn’t engage in dangerous hobbies or activities. Like most Americans, you would never think that you could become too sick or injured to go to work each day. Your ability to get up and go to work every day is one of the most important aspects of your life. The paycheck you earn allows you to pay your mortgage or rent, utilities and put food on the table for your family. It also allows you to enjoy vacations and provide a future for your family and yourself such as college education, and retirement. 

But, do you know what the chance is of an injury or illness preventing you from working?

• More than one in four 20-year-olds today will be unable to work due to an illness or injury for 1 year or more during their life before retirement.¹
   
• For all age groups, about 3 out of every 10 workers who will suffer an illness or injury that last 90 days or more.¹  

Yet, most people never believe they will never be that person. And if they have ever considered it, most feel as if a car accident would be the reason they would not be able to go to work and earn a paycheck. Let’s take a moment to look at the top 5 reasons for long term disability claims.

Top 5 Causes for Long Term Disability Claims¹

1. Musculoskeletal Disorders account for 29% of long term disability claims.  These include disorders affecting the back, spine, knees, hips, shoulders, etc.

2. Cancer is 15% of long term disability claims

3. Pregnancy, and complications of, accounts for 9.4% of long term disability claims

4. Mental and Nervous disorders, such as anxiety, depression, bipolar disorder, etc. are 9.1% of long term disability claims

5. Injuries account for 9% of all long term disability claims

Chances are you probably can think of someone you know – or maybe even more than just one - while in their working years, who has experienced one of these disorders or injuries.  While we do not want to think about ourselves as ill or injured, the reality is that if we can happen to someone you know, it can also happen to you.  So how do you plan for this unexpected event, so that if you are one of the 3 in 10, you are ready financially?

Planning for the Unexpected

A 2014 study showed that 15% of all bankruptcies were due to illness or injury of either you or a family member responsible for paying the bills.²  How do you make sure this does not happen to you?  What are your options?

Alternative to Your Paycheck

Savings

The average disability lasts 34.6 months.¹  That is just under 3 years.  Could you take off 3 years from work and still pay your bills from your savings?  Just about 50% of Americans, in a 2018 survey, said they do not have enough savings to cover more than 3 months of their current bills, and some even admitted they would not even be able to cover a $400 emergency without needing a loan or selling something³.  But if you are a good saver, how long would your savings last if you could not earn a paycheck?  Given the average American income and average expenses, if you save 5% of your income for 10 years, it would be gone after about 6 months if you had to use it to pay your bills and living expenses.  It is safe to say, that no matter how much you try to save, it would not be adequate to cover all your bills during a long term illness or injury.

Social Security

In December of 2018, the average monthly disability payment from social security to a disabled worker was $1233.70/month⁴.  This would most likely not come close to covering all of your living expenses, even if there is another person in your household working and contributing.  Again, not an adequate source to replace your paycheck.

Worker’s Compensation

Your employer may be required by law to cover all their employees under a Worker’s Compensation plan.  However, if you are self-employed, or you are the employer, you may not be covered by this plan.  Even if you are an employee and covered by such a plan, most illnesses and injuries do NOT occur at the workplace or due to the workplace, therefore, Worker’s Compensation would not cover this event.

Loans

How long and how much would your family or friends being willing to give you to help out with your bills if you were sick or injured and could not work?  Recognizing that more than half of Americans cannot even cover their own bills if they could not work for more than 90 days, your friends and family probably do not have the funds to offer, even if they wanted to help, or at least not for very long.  And do you think a bank would approve you for a loan, without being actively at work?  Most likely not.

Group or Employer-Sponsored Long Term Disability Plans

There are some employers who offer Group Long Term Disability (Group LTD) as a part of their benefits packages.  But, how much do you know about that plan?  If the employer offers it as a “free” benefit, where they pay your premiums.  However, if you do collect under the policy, you have to pay taxes on any benefits you receive.  The typical group LTD covers 60 or 66 2/3 of your typical monthly income.  Once you pay the taxes on that benefit, you are only bringing home 40% of your income.  And if you are a highly compensated employee the plan monthly maximum may even further reduce the monthly amount you receive and still need to pay taxes on, or some of your compensation may not be considered in the formula, such as bonuses, commissions, stock purchases, etc.

Individual Disability Insurance Policy

This is the best, most secure option for protecting your paycheck in the unfortunate event that you are too sick or injured and cannot work.  You are paying your own premiums for this coverage, therefore, the benefits are tax-free.  Typically, with no other group coverage, you can purchase an individual disability insurance policy that will cover 40-65% of your income.  But remember, it will be a tax-free benefit if you collect, so you will actually bring home closer to 70-80% of your normal after-tax paycheck you were used to.  Even if you do have group LTD through your employer, you may be eligible for a smaller individual policy above what the group plan pays, to bridge that gap between what the group benefit, after you pay taxes, looks like and what your paycheck you bring home looks like. 
     
1 Council for Disability Awareness
2 Austin, Daniel A., Medical Debt as a Cause of Consumer Bankruptcy (2014). Maine Law Review, Volume 67, No. 1, pp. 1 – 23 (2014); Northeastern University School of Law Research Paper No. 204-2014. Available at SSRN.  See especially Table 1 (as cited by the Council for Disability Awareness).
3 Federal Reserve.  Report on the Economic Well-Being of US Households in 2018
4 Social Security Administration. Annual Statistical Report on the Social Security Disability Insurance Program, 2018. Table 20