Do You Need Disability Insurance? Three Things to Know

A woman reads a book while propping up her leg, which is in a cast. — (Image credit: Getty Images)

When it comes to comprehensive wealth planning, it's crucial to consider all aspects of financial security.

Discussions around insurance often prioritize life insurance and less frequently focus on disability insurance, but in general, Americans are about 3.5 times more likely to become disabled than to die in any particular year.

In the event that you become disabled and are unable to work, disability insurance can help safeguard your financial stability and function as a cornerstone of a holistic plan.

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If you don’t already have coverage, you may want to discuss your options with your financial adviser or your insurance agent.

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If you’re considering disability insurance, here are a few things to keep in mind:

1. Short-term vs long-term disability

Short-term and long-term disability insurance both provide coverage for disabilities that are not job-related, but they differ in duration and terms.

Short-term disability insurance is typically available only through your employer. It provides benefits for a limited period, usually up to a year, if you are unable to work due to an illness, accident or even pregnancy.

Short-term disability benefits generally begin after an “elimination period,” which is often 30 days.

In contrast, long-term disability benefits kick in after a longer elimination period, usually between 90 and 180 days. It can continue to provide benefits until the age of 65 or you are no longer disabled.

Short-term disability generally covers you during your long-term disability elimination period.

2. Private disability policy

Employer-provided disability insurance can offer good coverage, but you may be wondering if you need a private disability policy.

Two reasons to consider a private policy are the taxability of the benefit and portability of coverage. You should also consider whether your employer-provided coverage would replace enough of your income should you become disabled.

If you pay the premium for your employer-provided disability policy with pre-tax dollars, which is the case at many companies, then any benefit you receive under that policy would be subject to income tax.

But if you pay your premium with after-tax dollars, either for your employer’s coverage or a private policy, your benefit would be tax-free.

It’s important to factor in how taxes may impact your benefit to determine whether you need to adjust your employer’s coverage or supplement it with private coverage.

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You should also consider the portability of coverage. Employer disability policies are generally not transferable if you leave your job.

If you want to be sure that you have disability insurance regardless of where you work — or even if you decide to start your own business — you would need a private policy to be covered.

3. 'Own occupation' coverage

A key advantage with a private policy is that you can tailor your benefits to your needs. One common feature is including coverage if you are disabled and unable to perform the regular duties of your “own occupation,” or the job you held when you bought the policy. Different insurers have different names for this benefit.

In many long-term disability policies, you may not be deemed to be disabled if you are able to do any work at all.

But if you are insured through a private policy for your “own occupation,” you can receive benefits even if you are able to work in an alternative occupation than the one you held when you purchased the policy.

Disability insurance is often overlooked, but it can be an important component of wealth planning and peace of mind.

You should take into account your personal situation and consider speaking with a financial adviser or your insurance agent to figure out which policies make sense for you.

JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.

J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment adviser, member FINRA and SIPC.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Adam leads J.P. Morgan Wealth Management's Wealth Planning and Advice team, which is responsible for wealth planning, thought leadership and strategic planning for individual clients. This national team of former practicing lawyers provides experience in estate and tax planning strategies, retirement planning, restricted and control stock and stock option management, business succession planning, pre- and post-transactional planning, concentrated position management and other personal planning strategies. The team provides internal training to the J.P. Morgan Wealth Management sales force on these topics and also creates content for distribution to the public.