Long-Term Disability: Protecting Your Income in Financial Planning
When we think about financial planning, we often focus on investing, retirement, or paying down debt. But one of the biggest risks to your financial future is something most people overlook: long-term disability.
Your ability to earn an income is your greatest financial asset. If that income stops because of an illness or injury, your entire financial plan can be thrown off course. That is why protecting against the risk of long-term disability is such an important part of comprehensive planning.
Why Long-Term Disability Matters
More than one in four workers will experience a disability before reaching retirement age. That does not always mean something catastrophic. It can be a health condition or injury that keeps you from performing your job for months or years.
Without your paycheck, how long could you maintain your lifestyle, keep saving, and support your family? Disability insurance provides an income stream to help you stay on track, even if you cannot work.
Employer Coverage vs. Individual Coverage
Many people receive long-term disability insurance through their employer. This is a valuable benefit, but there are often gaps to understand:
Out-of-pocket maximums: Group coverage may cap benefits at a dollar amount that is well below your actual income.
Income replacement percentage: Most plans replace only 50 to 60 percent of your salary, which may not be enough.
Tax treatment: If your employer pays the premiums, benefits are usually taxable, reducing your net income further.
Definition of disability: The difference between “own occupation” and “any occupation” can determine whether or not you qualify for benefits.
Portability: Employer coverage typically does not follow you if you change jobs.
Because of these limitations, it often makes sense to evaluate supplemental individual coverage.
The Importance of Policy Details
When reviewing coverage, three factors stand out:
Out-of-pocket maximums: We look closely at benefit caps in group policies to see how much protection you really have.
Own occupation vs. any occupation: Own occupation policies protect your ability to do the specific job you trained for, while any occupation policies require that you be unable to do any job that fits your background.
Inflation adjustments: Without cost-of-living adjustments, your benefits may lose value over time.
These details can make a major difference in how much support a policy provides if you ever need it.
How We Plan for Disability at MFP
At Memento Financial Planning, we do not treat disability coverage as a stand-alone product. We integrate it into your entire financial plan. Our process looks like this:
Review your current coverage: We request the full policy to understand waiting periods, benefit amounts, definitions, and caps.
Model your financial plan under stress: We consider what tradeoffs would need to happen if you could no longer work. Could you still save for retirement? Could you maintain your lifestyle?
Determine a target replacement percentage: Our goal is to secure enough income replacement so you can continue with your plan as intended, without having to sacrifice core goals.
Fill the gaps: If employer coverage falls short, we explore supplemental policies that align with your needs.
The goal is not to over-insure, but to protect your plan from being derailed.
Final Thoughts
Long-term disability is not a pleasant subject, but it is one of the most important risks to address in financial planning. By reviewing your coverage, understanding the fine print, and making sure you have adequate protection, you create the space for your financial plan to work even when life does not go according to plan.
This content is for informational purposes only and should not be construed as tax or investment advice. Please consult with a qualified tax professional or financial advisor before making decisions related to your financial situation. Memento Financial Planning is a Registered Investment Adviser in the Commonwealth of Massachusetts.
