Open Enrollment, Part 3: Disability Insurance

This is the third installment of the Open Enrollment mini series. I cover disability insurance in this post. Other posts in the series are:

Short Term Disability (STD)

Disability Insurance provides income to you if you become disabled. Being disabled is probably worse than death in terms of its financial impact to someone’s life. If you die, you are gone, together with your debt and expenses. If you are disabled and you can’t work, you don’t have income but you still have expenses to pay.

For a younger person, the chance of becoming disabled is much higher than death. So if you depend on income from your labor, it is very important that you obtain disability insurance. For female employees, time off before and after child birth is also covered under the short term disability program.

Some states, California, Hawaii, New Jersey, New York, Puerto Rico, and Rhode Island, have a mandated short-term disability program. All covered employees must pay into the state program or an equivalent program established by the employer. My employer offers a short-term disability plan at no cost to the employee. It pays 80% of base pay until the long term disability plan kicks in.

No decision for me here because I’m covered by the employer’s plan. If you don’t have short term disability coverage from either the state or your employer, you will have to save some money in your emergency fund. Your emergency fund will cover the income shortfall if you become disabled.

Long Term Disability (LTD)

Long term disability is even more devastating than short term disability. If you recover from your disability in a few months, you can use your emergency fund to bridge the income gap. If your disability is long term and you don’t have long term disability insurance, you would likely exhaust your emergency fund. Hardly anyone has an emergency fund that can provide enough income for years and years.

Social Security provides some long term disability coverage. However, it’s hard to qualify for payments from Social Security Disability program. Anecdotes I heard from people who helped the employees file the claims were that more than half of the claims were denied by Social Security on the first attempt. On second and perhaps third try, Social Security may finally budge and approve the claim.

Because Social Security is quite strict in approving claims, you should have your own long term disability coverage, either from your employer or purchased from an insurance company.

Disability insurance is quite expensive. When I worked for a company which didn’t offer long term disability, I had to buy a policy myself. The premium was about $1,500 a year for a modest coverage level.

Fortunately my current employer offers long term disability coverage at no cost to the employee. After 180 days of disability, it pays 2/3 of base pay until age 65. The payment is not indexed to inflation, but I think I will do just fine by tapping into my savings for the shortfall or reduce my standard of living.

No decision for me here because my employer covers me.

Some employers offer the option for the employee to pay tax on the insurance premium. If the employee pays tax on the premium, the payout will be tax free. This effectively bumps up the coverage level.

My employer’s plan doesn’t offer this option. If it did, I would choose to pay the tax (and make future payouts tax fee), because I think my expenses will be higher if I’m disabled.

The final post in the series will be on Flexible Spending Account.