If you were to experience a disability that hindered your ability to work, how would you survive financially without income? 30 percent of adults don’t even have $400 in emergency savings, let alone enough stashed away to cover months of lost income. What’s more, only 40 percent of American workers have access to short-term disability insurance through their employer and only 35 percent have access to long-term disability insurance.
For most Americans, becoming disabled has financially devastating consequences. In fact, about two-thirds of Americans who file for bankruptcy do so at least in part because of medical issues. Disability without income replacement can eat up your savings quickly — the average long-term disability claim duration is about 35 months.
What’s more, disability is more common than most people realize. More than one quarter of today’s 20-year-olds are expected to become disabled for at least one year before reaching retirement age. So, how should families prepare for disability, and what can you do if you become disabled without an active disability insurance policy? Here’s everything you need to know.
What Is Disability?
There are a couple of different definitions of disability:
- The Americans with Disabilities Act, a civil rights law enacted in 1990 that forbids discrimination against people with disabilities, defines disability as “a physical or mental impairment that substantially limits one or more major life activity.”
- The Social Security Administration, which provides benefits to people with disabilities, defines disability in terms of eligibility for its two programs. According to the SSA, disability is “the inability to engage in any substantial gainful activity (SGA) by reason of any medically determinable physical or mental impairment(s) which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.”
Most disabilities aren’t work-related, so most people who become disabled aren’t entitled to worker’s compensation benefits. More commonly, people file long-term disability claims because of cancer or musculoskeletal disorders. Pregnancy is the most common reason for a short-term disability claim.
Preparing for Potential Disability
The best way to protect your financial health is to plan for disability before it strikes. That means ensuring your income is covered in the event you become disabled. If you don’t have access to disability insurance through your employer, you should purchase an individual policy, especially if you have a spouse or dependents counting on your income. Even if your employer provides disability insurance, you should ensure that it is sufficient for your needs, since many plans don’t have robust enough coverage to protect you financially. The following coverages may provide a source of income should you experience a disability.
Short-Term Disability Insurance
Most employers offer short-term disability insurance as part of their benefits package. In five states, employers are required to provide these plans (California, Hawaii, New Jersey, New York, and Rhode Island). This type of insurance replaces up to 80 percent of your pre-tax income if you experience a short-term illness or injury lasting up to a year. You usually only have to wait a few weeks after filing a claim for benefits to kick in.
Long-Term Disability Insurance
Long-term disability insurance is even more important than short-term disability insurance, since some workers are able to cover their income during a short-term illness or injury with emergency savings. Long-term disability insurance is offered by many employers and can also be purchased individually. When the benefit is offered through your employer, you have to pay taxes on the funds you receive. If you purchase a policy individually, on the other hand, you won’t need to worry about the benefit amount being taxed.
Long-term disability policies come in benefit terms of several years or last until retirement. You’ll usually pay about one to three percent of your annual salary for an individual policy. There’s typically a waiting period of 30 or 90 days after filing a claim before the benefits kick in.
Additionally, there are a couple of types of long-term disability policies to be aware of:
- Own Occupation Disability Insurance: With this type of policy, you’ll be deemed to have a disability if you can’t work at your normal job. With true own occupation insurance, you’ll get the benefits even if you can get a job in another field.
- Any Occupation Disability Insurance: This type of policy often costs less, but defines disability as the inability to work in any occupation, which is more difficult to prove. For example, let’s say you previously worked as an accountant. If you can’t work as an accountant because of your disability but you can work as a custodian, your life insurance provider won’t pay any benefits, and you’ll be stuck with the drop in your salary.
Social Security Disability Insurance
For low-income workers who weren’t offered disability insurance through their employer and were unable to afford an individual policy, federal programs may provide benefits in the event of disability. However, eligibility requirements are strict, and about two-thirds of claims are denied. And the average monthly benefit received was only $1,257.65. Without other income, that puts SSDI recipients below the federal poverty line.
To be eligible for SSDI, you must:
- Have worked enough: You need 40 work credits, which in 2021 are worth $1,470 in income, and 20 credits must have been earned in the last 10 years. However, younger workers may not need as many credits to be eligible. For example, if you’re under 24, you only need to have only earned six credits in the last three years before applying for benefits.
- Have a total disability: Short-term and partial disabilities do not qualify for SSDI. To be eligible, you must have a total disability that is expected to last longer than a year or result in death. Your disability must also prevent you from performing job duties in your own occupation or in another field. You may still be able to work, but if you earn more than $1,310 per month, you won’t qualify.
There’s a five-month waiting period before you can receive SSDI benefits, so you should apply as soon as you become disabled.
Supplemental Security Income
If you have limited income and resources and are age 65 or older, blind, or disabled, you may qualify for Supplemental Security Income, even if you haven’t met the work requirements for SSDI. The amount is capped at $794 per month for eligible individuals in 2021, but most states supplement this amount. It’s tough to qualify for SSI, since you need to have less than $2,000 in assets ($3,000 for a married couple) and very limited income. However, some people will qualify for SSDI and SSI concurrently. This can help if your SSDI benefit amount is low.
Worker’s Compensation
Requirements vary by state, but most businesses are required to carry worker’s compensation for their employees. This type of business insurance covers medical care, lost wages, and more in the event that an employee suffers a work-related injury or illness. Benefits aren’t taxable unless you’re also receiving SSDI or SSI. The amount of benefits you’ll receive will depend on your average weekly wage and the severity of your disability.
You shouldn’t rely on worker’s compensation, since work-related injuries are rare compared to other disabilities. Less than one percent of workers missed work due to a work-related injury or illness in 2019. You’re more likely to experience a disability that isn’t directly related to work, in which case you would need disability insurance to protect your finances.
VA Disability Compensation
If you served in the military and suffered an injury or illness, or if serving in the military made an existing condition worse, you and your dependents may be eligible for monthly tax-free benefits from the U.S. Department of Veterans Affairs.
Emergency Fund
While a six-month emergency fund may cover a short-term disability, most Americans should have long-term disability insurance as well. That said, since many policies come with a 90-day elimination period, you should have at least three months worth of expenses saved in an emergency fund, even if you’re protected with long-term disability insurance.
Steps to Take if You Become Disabled
- Seek support. Individuals with disabilities are more likely to experience mental distress. It’s important to get support from friends and family, and you may also seek help from a counselor. You might also consider getting a service animal. If you need free job support, you can get help from the SSA’s Ticket to Work program.
- File a claim. If you have disability insurance, you should start by filing a claim with your provider. If you don’t have insurance, apply for SSDI or SSI as soon as you can, since it takes months to start getting benefits.
- Make sure you have health insurance. If you qualify for SSDI, you’ll get access to Medicare, but there’s a 24-month waiting period. Depending on your income, you may be able to apply for Medicaid in the meantime. SSI recipients are automatically eligible for Medicaid. If you’re receiving worker’s compensation or VA disability compensation, you may also qualify for Medicaid, since these payments don’t count as income for the purposes of determining your Medicaid eligibility. Similarly, private disability benefits from your own individual plan generally don’t count as income. However, you will need to report benefits from an employer-sponsored plan. If you don’t qualify for Medicaid, you’ll need to purchase coverage through the marketplace or apply for COBRA.
- Apply for other federal assistance programs. If your income is reduced due to your disability, you may also qualify for SNAP (food stamps), Temporary Assistance for Needy Families (TANF), the Low Income Home Energy Assistance Program (LIHEAP), and other government benefits. These can help reduce your out-of-pocket costs.
- Get to know your rights. You should take the time to familiarize yourself with disability rights laws. You may also qualify for free legal help if you have questions or concerns.
- Reevaluate your finances. Whether you’re relying on SSDI or long-term disability insurance benefits, your income will likely be reduced if you’re unable to work due to your disability. Take the time to adjust your budget so you can still save for future emergencies.
Getting a Loan with No Job
Most lenders require proof of income to get a loan, but it doesn’t necessarily have to be employment income. Your disability benefits can be used to qualify for a loan. However, you should exercise caution when borrowing money while your income is limited.
If you’re waiting for your disability benefits to kick in and you don’t have enough in an emergency fund to tide you over, there are a few ways you can borrow money with no income:
- Borrow from family or friends
- Ask a creditworthy friend or family member to cosign on a loan
- Use an existing credit card
- Apply for a home equity loan or a home equity line of credit (HELOC)
The Bottom Line
Experiencing a disability doesn’t just impact your physical and/or mental health. It can also bring financial hardship that is difficult to overcome. That’s why it’s important to prepare for the possibility that disability will preclude you from working. The best way to protect yourself financially is to purchase a long-term disability insurance policy and keep enough cash in an emergency fund to provide for your family in the short-term. However, if you’ve recently experienced disability and were not prepared with an insurance policy, there are federal programs that can help.
The information contained herein is provided for free and is to be used for educational and informational purposes only. Consult a financial professional for specific help with your situation.