Understanding disability insurance
Managing Director, Head of Wealth Planning and Advice, J.P. Morgan Wealth Management
Disability insurance can help replace some of your income if you become disabled and are prevented from working, either in the short term or the long term.
When speaking with your advisors about insurance, the conversation will often focus on life insurance and rarely on disability insurance. However, it’s far more likely that you will become disabled while you are employed than you will pass away during that time. Here are some things to keep in mind as you consider disability insurance:
What’s the difference between short-term disability and long-term disability?
Both short-term and long-term disability insurance cover you for a disability that is not job-related. Benefits generally begin after an elimination period, which is a waiting period at the beginning of your disability before your insurance begins to pay out. In general, short-term disability insurance is only available through your employer. If you are unable to work because of an illness or accident, or even a pregnancy, short-term disability will pay a benefit for a short period of time, usually one year or less. It will begin after an elimination period, which is often 30 days. Long-term disability pays a benefit after a longer elimination period (generally between 90 and 180 days), but payments continue until you are 65 or are no longer disabled.
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The elimination period for your long-term disability insurance (if you have it) often coincides with your short-term benefits period.
I’m covered through my employer. Do I need a private disability policy?
Many employer policies provide very good coverage. There are two things you should think about if you are considering a private policy.
- Taxability of benefit: If your disability premium is paid with a pre-tax deduction, as it is in many companies, your disability benefit would be taxable to you. On the other hand, if you pay your premium (either for your employer’s policy or for a private policy) with after-tax dollars, your benefit would be tax-free when you collect it. Since taxes can take a significant bite out of your nominal benefit, consider whether you need to augment your employer’s coverage.
- Portability: An employer disability policy is generally not transferrable if you leave your job. If you leave to start your own business, or if you go to work for an employer who doesn’t provide coverage, you will need to have a private policy if you want disability coverage.
What are some other reasons to supplement my employer policy with a private policy?
A private policy allows you to tailor the benefits to your needs. One of the most common benefits that you might want to include is coverage if you are unable to perform the regular duties of your “own occupation” (different insurers have different names for this feature). In many long-term disability policies, if you can do any work at all, you may no longer be deemed to be disabled under the policy. If instead you are insured for your “own occupation” through a private policy, your disability coverage can continue even if you are able to work at a different occupation than the one in which you were employed when you bought the policy.
Talk to a J.P. Morgan professional or your insurance agent about your disability insurance needs and to review any existing coverage.
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