How disability and life insurance can help protect your paycheck and your family

Talking about (and planning for) the “what-ifs” in life is not a conversation that most people look forward to.

But avoiding those big conversations isn’t the answer, either. Take the “what-if” of injury. About one in four of today’s 20-year-olds will be out of work for at least a year before they reach retirement. The reason? A disabling condition.

What if you were one of them? What would your loved ones do if you were the primary source of income and couldn’t work for a year?

The possibility might be scary, but the planning doesn’t have to be. A good place to start is disability insurance, as well as life insurance. Knowing what they both are, how they work, and how much coverage you may need gives that conversation a less-scary start.

Disability insurance is simply insurance that offers financial support during a temporary or permanent disability.

Life insurance is insurance provided to beneficiaries after a person dies. They may use it to maintain their lifestyle, pay off debt, fund college, or other expenses. As with disability life insurance (see below), you may have life insurance through work, or you can purchase a policy on your own. You can also add riders or additional coverage based on your circumstances.

Disability insurance is either short-term or long-term. The “disability” encompasses more than just injury, and disability insurance may offer coverage for a range of conditions. (See below.)

That depends on the insurance provider. Take pregnancy leave; for the purposes of disability insurance, it’s typically a covered short-term condition. You may have surgery and need a few weeks to recover; that may be covered by disability insurance, too.

For disabilities that require a longer period of recovery, perhaps a full year or more, long-term disability insurance coverage may offer assistance. That may be something like a heart attack or cancer, for example. Musculoskeletal disorders like arthritis are the most common claim covered by long-term disability insurance.

In general, no; disability income provides a certain percentage of your base salary. The total varies by the company and the coverage, either short- or long-term. Long-term coverage replacement percentages tend to be less than short-term ones.

Maybe you’re thinking about disability insurance in case you had an accident. But the most common reason people can’t work is illness, not injury. Disability insurance helps you maintain your household and gives you time to recover.

“We generally think to protect our families and belongings through health, life, auto, and homeowners insurance, but we rarely think to protect our income stream,” says Stanley Poorman, a financial professional with Principal^® .

There are four main ways to get disability insurance coverage.

1. Through your employer: About half of all people employed in America—close to 70 million—get coverage paid in whole or in part by their employer.
2. With coverage purchased by the individual but provided by an employer: About 7 million people have access to disability insurance as a voluntary benefit at work, meaning they pay the whole cost (sometimes at a discount) through deductions from their paychecks.
3. As an individual: Individual disability policies are also available for purchase, typically from a financial professional.
4. From an association or group: Professional or alumni groups may also offer disability policies to members.

Let’s say you’re injured and unable to work for several months, but have short-term disability coverage through your employer. As with any insurance coverage, you’ll complete the appropriate paperwork to file an insurance claim. (A doctor often must complete paperwork, too.)

Once the company determines you are eligible for coverage, you’ll go through an elimination, or waiting, period. This is simply the number of days you must wait until you receive benefit payments, which are typically monthly. Your benefit payments continue for your benefit period, or how long you’re eligible to receive disability insurance.

That depends on the policy. If you have disability insurance through your employer, your benefits portal or your human resources department can provide information about your coverage, including the percentage of income replacement and benefit period. Otherwise, the providing insurance company can supply those details.

It depends on the source of the insurance. If disability insurance is provided by your employer, your benefits are typically subject to income tax. If you purchased the policy as an individual and used after-tax funds, you’ve already paid income tax. A tax professional can offer more insight.

Yes. You can add onto existing benefits through riders (basically an add on), increased coverage, or additional policies.

Let’s say you have long-term disability coverage that replaces 60% of your paycheck before taxes. Based on your situation, that may not be enough, and you may decide you need more coverage. You may be able to:

Your employer or a financial professional can help.

The choice probably depends on a number of factors, including your family, budget, and financial needs. A good place to get started is our disability income calculator.