Disability Insurance

Disability insurance protects your income — statistically, you're far more likely to become disabled during your working years than to die. A 35-year-old has roughly a 25% chance of becoming disabled for 3+ months before age 65. Without disability insurance, an extended inability to work can be financially catastrophic, depleting savings and creating debt.

There are two main types: short-term disability (STD) covers the first 3-6 months of disability, and long-term disability (LTD) kicks in after STD ends and can continue until age 65 or beyond. Many employers provide basic STD/LTD coverage, but it may be insufficient.

Employer-provided disability insurance typically replaces 50-60% of base salary (not including bonuses or commissions). Benefits from employer-paid policies are taxable, reducing the effective replacement to 35-45% of gross income. Individual policies with premiums you pay with after-tax dollars provide tax-free benefits.

Key policy terms to understand: the definition of disability ("own occupation" means you can't do your specific job; "any occupation" means you can't do any job — own occupation is much better), the elimination period (waiting period before benefits start, typically 90 days for LTD), the benefit period (how long benefits last), and residual/partial disability (benefits for reduced but not eliminated work capacity).

The optimal setup combines employer-provided coverage with a supplemental individual policy. The employer policy provides a base layer (often at no cost), and the individual policy fills the gap to reach 60-70% of total income replacement with tax-free benefits. This layered approach provides strong protection at reasonable cost.