PROTECTING Your Retirement Income

Disability Insurance

Disability insurance is a viable solution for protecting your retirement income plan against the possibility that you could become disabled and unable to work. An unprotected, or underprotected, disability event can severely reduce the longevity of, and potentially prematurely deplete, your investment assets, depending upon the severity of the event.

Disability insurance is designed to replace 45 to 60 percent of your gross income on a tax-free basis. If your employer pays your disability premiums and they aren't included in your gross income, your disability insurance benefits will be taxable.

Social Security Administration Definition of Disability

This isn't an area where you want to rely on the government for assistance. While the Social Security Administration offers disability benefits, it is extremely difficulty to qualify. In order to be eligible for Social Security disability, individuals must meet several qualification criteria set forth by the Social Security Administration (SSA).

First, any potential claimant must be able to prove to the SSA that he or she is "permanently disabled," or suffering from a condition that has lasted, or is expected to last, more than 12 calendar months. 

Second, SSA uses an "any occupation" (vs. "own occupation") definition of disability. SSA will attempt to make a judgment as to whether or not a claimant's disabling condition prevents the individual from achieving any type of "substantial gainful activity." The condition must not only prevent the claimant from performing the duties of his or her previous employment, but also make it impossible to find a new line of work due to age, education, or impairment.

Questions to Ask Yourself

If you aren't sure whether disability insurance is important, ask yourself the following four questions:

  • How long can you afford to live without your paycheck, or draw, if you're self-employed?
  • How would you and your family be affected financially and emotionally by your unemployment?
  • For how many days, weeks, or months could you support your current lifestyle before depleting the assets you've accumulated?
  • Do you have a plan to replace your income in the event that you become disabled and aren't able to work for an extended period of time?

Disability insurance is often referred to as "income protection insurance." It also helps you protect the assets you've set aside with the goal of becoming financially independent by making it less likely that you will deplete those assets to cover the cost of day-to-day expenses.

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