We talk a lot about how emergency funds of around 3-6 months are important to help you cover unexpected costs such as a big medical procedure, home repairs, an emergency vet bill, and even give you peace of mind and optionality when it comes to leaving a job you hate.
But what we don’t talk that much about is how an emergency fund can play a vital role in your financial life if you, or your partner, were to become disabled and unable to work for a period of time. These are the incredibly uncomfortable situations to think about, but often the situations in which people often look back and regret not paying more attention to before it became too late.
Disability is broader than what most of us tend to think of when we hear the word “disabled.” In fact, arthritis, musculoskeletal disorders, and mental health issues such as depression and anxiety are all common causes for short and long-term disabilities in the United States.
IF YOU OR OTHERS DEPEND ON YOUR INCOME, YOU NEED DISABLITY INSURANCE
Let’s say you’re a hairstylist and break your hand during a boxing class one day. If you can’t cut or color hair, how are you paying your bills?
If you’re a non-working SAHM (although, being a SAHM is a very hard job!) and your partner is the only one bringing in an income, who is paying the mortgage payment and grocery bills if their anxiety begins to impact their ability to make it to work safely and accomplish basic tasks, causing them to miss several months of work?
Let’s say you’re single so you’re responsible for everything in your financial life. You’re running late for work one day, slip down your stairs at home, and break your back. What then?
Having a well-stocked emergency fund will help quite a bit during any of the above scenarios, but those funds will be depleted quickly if you don’t have disability coverage to help replace a portion of your lost wages.
SHORT-TERM DISABILITY (STD) COVERAGE DEETS
If you’re temporarily unable to work due to an accident, illness, or even pregnancy, you may be eligible to receive short-term disability benefits. Short-term disability policies typically have a 7-30 day elimination period; the amount of time you must wait before collecting benefits. Once the elimination period has passed, you’ll usually receive up to 60% of your weekly gross income for typically only up to 52 weeks.
LONG-TERM DISABILITY (LTD) COVERAGE DEETS
If you’re suffering from a long-term illness or disability (work related injuries don’t count here because those would be covered under worker’s compensation laws!), long-term disability coverage can help replace some of your lost income during this time. Long term disability policies typically have a 90-180 day elimination period before you will receive benefits equal to 50%-70% of your pre-disability earnings. These benefits are payable for anywhere from 2 to 10 years, and in some cases up to your retirement age. Each disability policy will have its own specifications and details, so it’s important to read the fine print!
EMERGENCY FUND TO THE RESCUE
As you can see, the benefits payable under short-term and long-term disability policies are better than not having coverage at all, but the payout doesn’t cover 100% of your pre-disability earnings. Unless you plan to significantly cut monthly spending + life-related costs (which might be futile if you have increased expenses due to your disability!) to fit the payout of your disability benefits, this is where your emergency fund comes to the rescue.
If you have a 30-day elimination period on your short-term disability benefits, that means you must wait 30 days before receiving up to only 60% of your income. You can then utilize your emergency savings to cover the elimination period and supplement the 40%+ of lost wages that disability benefits won’t cover.
If you suffer from a long-term disability with a 90-day elimination period, that’s three months of living expenses your emergency fund can help you cover! And don’t forget you’ll likely need to supplement the other 30%-50% of lost wages that long-term disability benefits may not cover.
If you suffer from a long-term disability, and have both short and long-term coverage, your short-term disability will kick in per the terms of coverage and then your long-term disability coverage can take over once the long-term disability policy elimination period is covered.
WAITING CAN COST YOU
Oftentimes once the “disability” has already occurred, you’ll be unable to get coverage or if you are able to get coverage, your specific “pre-existing condition” will be excluded from coverage. For example: if you become pregnant without short-term disability coverage, you can still apply and qualify for coverage but pregnancy could be considered a “pre-existing condition” and therefore would not be covered. This means that when you go on maternity leave, you would not be eligible to receive benefits to recoup lost income.
HOW TO GET COVERAGE
First, I suggest checking with your employer. Some employers cover 100% of the cost of disability coverage, but even if they don’t, it’s likely worth it to explore the benefits offered during your annual open enrollment period. Typically, benefits offered through your employer’s group coverage is a lot cheaper than private coverage.
If your employer doesn’t offer short or long-term disability, it might be wise to investigate various group affiliations you’re connected with in your field of work prior to exploring private coverage with companies. For example, if you’re a realtor you can explore benefits offered at a discount through the National Association of Realtors, financial planners have access to benefits through the Financial Planning Association, and Freelancers can explore benefits offered through the Freelancers Union.
If you have any questions, I’m happy to chat more!