Handling the Unexpected: Disability

Humans are amazingly adaptive. But sometimes it takes a long time to recover from unexpected circumstances. Car crashes. Heart attacks. Random acts of violence. Back injuries. Cancer. These can have long lasting impacts on our ability to perform our jobs and earn money.

Your employer may offer sick time and a few weeks of short-term disability. But what if you still can't work after that? Half of all mortgage foreclosures are the result of long-term injuries or illness.

You can protect yourself from the financial effects of these situations with long-term disability insurance. Most people have car insurance, yet 60% of working adults in this country don't have coverage to protect their most valuable asset - the ability to earn a living.

Are you covered?
Check with your employer, you may already have long-term disability coverage. Many employees do and don't even know it. If you do, make sure you know how well you're covered. You don't want to wait until you really need the benefits to discover gaps in the coverage.

Does your benefit calculation include Social Security payments? Your policy may assume you will get Social Security disability payments in determining how much to pay out in case of a claim. But Social Security will only pay benefits if your disability will last more than 12 months or lead to death. There is a waiting period of five months before you qualify, and then another month before you receive benefits. So even if you have short-term disability coverage for the first 12 weeks, there will be several months of potential unpaid time.

Social Security disability covers you only if you are unable to perform ANY job, not just your current job. So even if you are used to sitting behind a computer or talking on the phone all day, the government will expect you to take any job you can get. Think of some of the jobs out there you might be expected to take! They may be much more physically demanding or lower paying that what you are accustomed to.

Your policy
Policies vary considerably from one to another. Make sure you know how well you are covered so that you can prepare around your policy. If your benefits are not great, you should save up more in your emergency fund.

Benefit Amount
Disability insurance pays only 60% of your current income. It's designed to be enough to cover your base expenses without offering incentive for people to abuse the system. If your employer pays your premiums as an employee benefit, the disability payments you receive will be taxable. If you pay your own premiums, your disability payments will be tax-free.

Term of Benefits
Check for how long your benefits will be paid. Some policies will cover you for only two years. Others provide lifelong benefits. Most policies are somewhere in between. You can lower your premiums by reducing the term of your benefits.

Premium
The amount you (or your employer) will pay for your coverage depends on so many variables that it's impossible to list them all here. But some of the main factors are your age, your gender (on average, women live longer - longer benefit payments mean higher premiums), your job (how dangerous is it?), your income (how much will they have to pay out?), your medical history and your lifestyle.

Non-cancelable
If your policy is non-cancelable, you're in luck. Once you have been approved, they can't cancel your policy or raise your rates unless they stop covering your entire job class.

Guaranteed Renewable
Not quite as good as non-cancelable, they can't cancel your policy (again, unless they stop covering your entire job class), but they can raise your rates.

Own Occupation
This is an important designation on your policy that determines what it means to be disabled. "Own occupation" means that you're disabled when you're unable to perform your current job. "Any occupation" means that you're disabled when you can't perform any job. Obviously "own occupation" is preferable but it's also more expensive.

Elimination Period
The elimination period is how long you'll wait after you are disabled to start receiving benefits. All policies have at least a 30 day waiting period before they start paying you benefits. Otherwise, if you missed one day from work, they would have to pay you for that day. But other policies will wait even longer to start paying - 60, 90 or even 120 days. The longer the elimination period, the lower the premium. To determine how long an elimination period you should get, figure out how long you could go without earning income. If you've saved up three months of expenses, take a 60-day elimination period (Benefits won't start until after you've been disabled for a month. Add a 60-day elimination period and you're at three months.) If you have a claim, file it as soon as possible. That will start the elimination period and start your benefits faster.

Money Discussions For Smart People

Money for a Goal

Value of Time

You can save without using more time. Cook at home instead of dining out. Rent a DVD instead of going to a theater. Cheaper activities often need more planning, like going to the store, but they have unexpected benefits, like working on your own schedule. When you do things at home, you don’t have to wait for a table, or wait in line to get good seats. My instinct is that cheaper activities average out to be no more time consuming.

Some people are averse to saving and don’t want to give up any purchases. You don’t see people embracing restraint in the land of the free. These people might decide to earn more instead of save more. This seems reasonable as money can also come from part-time jobs, like tutoring kids on the weekend. It seems easy.

But there is no free lunch. You need to give up time to earn this extra money. This could mean entertainment, time with friends, or time with family. As a working professional, I only had about 15 hours of free time per week, so an hour was a substantial amount.

Taxes Favor Savings

The second issue involves taxes. The extra money you earn is subject to income tax. Your take-home pay is less than your gross earnings, depending on your marginal tax level. For a middle class American, income taxes could eat up about 25% of extra earnings.

Using that figure, you would need to earn about $667 to fund a $500 vacation.

Savings don’t have this issue, as they don’t get taxed again. Savings are already an after-tax amount. Whatever you save is a direct increase to your spending ability. An example: the $10 you would have spent on a movie would be a direct $10 for use on the vacation.

That’s the beauty of savings: you don’t have to save more than necessary. I don’t know about you, but I would rather save the exact amount than work an extra $167.

Some Caveats

As I warned at the start, it’s not always better to save more than earn more. After all, if you don’t earn enough, it’s difficult to save as income goes to immediate necessities. I can think of a few times when earning more is the better candidate.

One candidate is when you feel undervalued at your current job. A new job can give you more time and money.

Another is if you want to fund a retirement account. Money you stash here is often tax-advantaged, so additional earnings might not wilt away in taxes. Also, company 401(k) matches are larger dollar amounts for higher earning workers that participate.

And it’s worth stating the obvious too, that you can do other things besides saving more or earning more. Neither option will help to make better decisions in the first place, like whether you should be taking that $500 vacation.

But when I’m committed to a short-term goal, it’s all about savings. You’ll be more likely to see me lazing on my sofa than spending more hours in the office.