Broker Check

Let’s Talk About Disability

February 24, 2023

Our blogs are typically about investing and what’s going on in the economy, but there is a large segment of financial planning that people often overlook, and that would be a disability. Here is an alarming statistic: according to Social Security (, there is a 25% chance for a 20-year-old to be disabled at some point during his or her career. That’s almost double the chances that same 20-year-old has of dying during working years; however, if you ask most people, they will more than likely have some form of term life insurance, but no real disability insurance to speak of.

Sure, many companies offer their employees free disability insurance as a benefit, but let’s talk about that for a minute. What most don’t understand is disability benefits through work are a tax deduction for their employer, so if the employee ever needs to use the disability, the benefit received is taxable to the employee. Let’s review that with the following example:

  • Maggie is a 27-year-old that has a good job paying her $8,500 per month before taxes. She pays rent of $1,800 per month, a car payment of $300 per month, and student loans of $581 per month. After paying utilities, phone bills, food, insurance, taxes, saving for retirement, leisure activities, etc., she has roughly $560 left that she squirrels away for savings. Not too shabby.
  • Unfortunately, Maggie found herself in a medical situation that is causing her not to be able to work. Her doctor signed off on her disability policy through work, and it looks like she may not be able to work for 6-9 months.
  • Maggie’s employer-based disability policy is pretty standard and is based on 60% of her gross pay of $8,500 per month, so she will receive $5,100 per month. However, since it is an employer-based benefit the disability benefit that Maggie receives will have to be taxed. So, Maggie’s benefit after tax will be approximately $4,580 per month.
  • If you recall, Maggie had almost $3,000 in fixed monthly payments she had to make before even buying food (rent, loans, etc.) and keeping her lights on. Losing 40% of her income for those 6-9 months is going to be very difficult for her financially, and that’s not adding any added medical expenses she would have to pay due to her condition. Sure, Maggie may ask her student loan provider to modify her payments, but that will take time.

Imagine if Maggie’s situation was direr. Imagine that instead of only being out of work for 6-9 months, she was permanently out of work. Now, she has another problem altogether. Maggie will more than likely not have enough money left over to save for her own retirement. Because Maggie’s earnings potential was stunted due to her disability, her Social Security did not grow in the same manner it would have otherwise, and she was unable to build her retirement savings.

Situations like this happen more than we would like to admit. Stop for a minute today, and ask yourself what your financial situation would look like if you were disabled and lost 40% of your pay. If you work for a smaller business or are a small business owner, chances are you have no disability coverage at all. With a 25% chance of being disabled during your working years, is this a gamble you want to take?

There are things you can do to help reduce these risks. If you have something through work, that’s great! You may want to take a look at your coverage and think about getting a small personal disability policy to supplement it. If your employer doesn’t offer disability coverage, you really may want to look at getting something personally. Your personal policy can be tailored to your needs so that it’s cost-efficient.

As always, feel free to let us know if you have any questions, and pass along this information to anyone you think may be interested.

This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact the appropriate professional. This article is intended to assist in educating you about insurance generally and not to provide personal service. Guarantees are based on the claims paying ability of the issuing company.