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Short Term Disability Insurance
Short Term Disability Insurance is insurance designed to pay benefits for a brief period of time (usually a few months) while someone is disabled. The benefits are usually only a portion of your monthly income, and Short Term Disability Insurance is designed to kick in after a shorter waiting period than Long Term Disability Insurance, usually after just a couple of weeks of being disabled. The value of benefits, the numbers of days before the benefits begin, and the length of time the benefits will last all depend on the specific type of policy you have, but the overall purpose of most Short Term Disability Policies is to get you and your family through a brief period of time when your income is drastically reduced due to illness or injury.
If you end up getting hurt, having a policy is likely best, but as they say, hindsight is 20/20. If you have a highly specialized occupation that would require you to take a substantial reduction in salary to work in a different role, or if you have a very dangerous job (like logging, roofing, or Alaskan King Crab fishing), making sure you have sufficient Short Term Disability Insurance is probably a good idea. That being said, for the Average Joe like me whose greatest daily dangers are my miniature dachshund’s teeth and tripping over my own desk chair, you probably should consider passing on Short Term Disability Insurance IF you have a sufficient rainy day fund. As you may recall, a rainy day fund is supposed to be between at least three and six months’ worth of living expenses that you have set aside in case an emergency occurs or you lose your job… or you are temporarily disabled. A sufficient rainy day fund essentially allows you to self-insure. As you will see below, I’m a much bigger fan of Long Term Disability Insurance than I am of Short Term Disability Insurance, and that is due in large part to how much more comfortable and satisfied many of my clients and I are that they have a sufficient rainy day fund versus relying on (and having to wait for) the insurance company to come through in the event of a temporary injury or sickness. Building up a rainy day fund may not be that much fun or even the easiest thing to do, but after you’ve done it, it won’t be long before it beats paying those Short Term Disability Insurance premiums over and over and over again.
Long Term Disability Insurance
As you might expect, Long Term Disability Insurance is insurance designed to pay benefits for an extended period of time should someone become totally or permanently disabled (or at least disabled for more than a few months). In a nutshell, Long Term Disability Insurance is supposed to pick up where Short Term Disability Insurance (or your rainy day fund) leaves off and get you to where Social Security begins. Because Long Term Disability Insurance could be the only thing protecting you and your family from financial ruin should you become disabled for an extended period of time, it is crucial to make sure you are adequately insured.
There are way too many types of Long Term Disability Insurance policies out there for me to try to cover today, and the truth is, the type of Long Term Disability Insurance you need, if any, will be very specific to you, your job, and your overall financial situation. The key thing I can tell you is that you need to make sure that the benefits of any Long Term Disability Insurance coverage you may have individually or through your employer equates to a standard of living that you are willing to accept should you become disabled for an extended period of time. I can also tell you that if you only have enough money to put towards one type of disability insurance, Long Term Disability Insurance is the way to go. You can get through a few months someway, somehow; getting through a few years or a lifetime with little or no income would be a lot harder.
One final tidbit I can add is directed towards those workers who have the opportunity to choose whether they or their employer pays the Long Term Disability Insurance premiums. Pay the premiums yourself! I know that sounds crazy, but if you end up utilizing your Long Term Disability Insurance and you have paid the premiums, the benefits you receive will be tax-free! If you let your employer pay those same premiums, the benefits you receive will be taxed as ordinary income. Please don’t allow taxes to make your situation worse.
Long Term Care Insurance
Long Term Care Insurance is just like disability insurance in the sense that you might really need it if you somehow know you are going to require health care services for a long period of time, but it can be a complete and utter waste of money if you go out with a bang or quickly and peacefully in your sleep. If you can tell me your “exit strategy,” I can tell you whether or not you need Long Term Care Insurance. You may laugh, but I promise you I’ve had a client look me dead in the eyes and with no hesitation tell me he was going to die in his 84th year. (I’ll let you know how that turns out in 2015!)
Once again, there are all sorts of Long Term Care Insurance policies out there for all sorts of people with different needs, different concerns, and different amounts of money available to throw towards these types of policies, but I can offer a few thoughts.
First, I advise clients who are considering Long Term Care Insurance to think about a baseball bat. Anyone who has ever hit a line drive will tell you that a baseball bat has a sweet spot, and so does Long Term Care Insurance. What I mean is that if the premiums for a Long Term Care Insurance policy would cause substantial strain on your financial situation, you might want to consider passing on coverage that you may never use. If you have a lot of assets and believe you could cover all of your prolonged health care expenses in most all situations, you might want to consider passing on this usually pricey coverage and going with the self-insured approach. If you are at a place where paying premiums won’t be a strain, but you have some concerns about your and your family’s ability to be able to handle the costs of your future health care needs, then you are the sweet spot; you should probably consider Long Term Care Insurance. (Please know that should you or someone you care for need health care services for a long period of time, having a policy is likely best, but you probably already knew that.)
Second, if you are pretty bent on getting this type of coverage, the younger you are the better. You can get more favorable policies at better rates. If you wait until later in life to consider these policies, you will find the cost can be like life insurance - almost unaffordable.
Finally, if you have an annuity and a Long Term Care Insurance policy, there may be a tax savings opportunity for you. If you pay your premiums directly out of your annuity, the distribution could be considered tax-free thanks to the Pension Protection Act of 2006. Please reach out to your investment advisor or CPA if you have any specific questions about this tax break.
I know Short Term Disability Insurance, Long Term Disability Insurance, and Long Term Care Insurance are not fun to think about, but you’ve got to admit, they are at least worth considering. It is my hope that anyone reading this will never have the opportunity to utilize any of the benefits related to these types of policies. I also hope the few thoughts I have shared above will be of assistance.
-Tom
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