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WalletPrep worksheet · Protect yourself

Do I need disability insurance?

Name ____________________ Date __________

Key ideas

  1. It replaces part of your pay. A typical policy pays about 60% of your earnings before the disability. Medical bills belong to health insurance.
  2. Long-term coverage is the one to have. Short-term plans cover weeks or months. Long-term plans can pay for years, which is the loss you couldn't absorb yourself.
  3. Your emergency fund covers the wait. Benefits start after a waiting period, often 90 days for long-term plans. In the example, that wait costs $8,400 in essentials.

Vocabulary

Elimination period
The time you must be disabled before a disability policy starts paying, often 30 to 90 days or more.
Emergency fund
Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.

Work it out

Priya earns $5,000 a month before taxes. Her employer's long-term disability plan pays 60% after a 90-day wait. Her essential bills are $2,800 a month.

  1. Monthly pay
  2. Disability benefit (60%)
  3. Income lost each month
  4. Essentials, month 1
  5. Month 2
  6. Month 3
  7. Cash to cover the 90-day wait

Check yourself

  1. What does disability insurance pay for?

    • A. Your hospital and doctor bills
    • B. Part of your lost income
    • C. Repairs to your car after a crash
    • D. Your funeral costs

  2. You earn $4,000 a month and your policy pays 60%. What is the monthly benefit before tax?

    • A. $1,600
    • B. $2,000
    • C. $2,400
    • D. $3,000

  3. When are disability benefits tax free?

    • A. When you paid the whole premium with after-tax money
    • B. When your employer paid the premium
    • C. When you paid the premium pre-tax through payroll
    • D. Always

Your turn

Open your benefits portal and find your long-term disability plan. Write down the percent of pay, the monthly cap and the waiting period, then multiply your monthly essentials by the months of waiting to see the cash you need on hand.

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Answer key

Do I need disability insurance?

Work it out

  1. Monthly pay$5,000
  2. Disability benefit (60%)− $3,000
  3. Income lost each month= $2,000
  4. Essentials, month 1$2,800
  5. Month 2$2,800
  6. Month 3$2,800
  7. Cash to cover the 90-day wait= $8,400
  1. The plan pays $5,000 × 60% = $3,000 a month, so Priya's income drops by $2,000. Her employer pays the premium, so the $3,000 is taxable.
  2. Nothing is paid during the 90-day wait. Three months of essentials is $2,800 + $2,800 + $2,800 = $8,400, which her emergency fund needs to hold.
  3. Once checks start, $3,000 covers her $2,800 of essentials before tax. She plans to trim other spending until she can work again.

Check yourself

  1. B. Part of your lost income Disability insurance replaces part of your income while you can't work. Health insurance pays medical bills.
  2. C. $2,400 $4,000 × 60% = $2,400. That is the benefit before any tax.
  3. A. When you paid the whole premium with after-tax money The IRS says benefits are tax free only if you paid the entire premium with after-tax dollars. Employer-paid or pre-tax premiums make benefits taxable.