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Preparing for the Unforeseen: Disability Insurance and Emergency Funds

Financial Planning for Uncertain Times

Gain a better understanding of disability insurance protections, unemployment insurance benefits and emergency funds and learn how to ensure you and your family safely navigate calamities, challenges or disasters in uncertain financial times.

Emergency Funds and Insurance

Working professionals, anyone with a family, a home or any net worth worry about the future. Layoffs, illness, accidents, catastrophes, national debt ceilings or the potential collapse of social security, it’s enough to cause sleepless nights for even the most accomplished or secure individual. And, life isn’t trending to be any easier for anyone.

While we can’t predict the future, we can prepare for calamity. We’re not talking about a bunker with canned goods and bottled water. It’s not doomsday prepping. We are talking about a few financial steps you can take which will see your family through any unforeseen disaster.

Outlining how you can prepare for layoffs and illness or injury that prevents you from working, we’ll offer guidance to get you started and perhaps a little motivation. We’ll also explore the differences between disability insurance, unemployment insurance and your emergency fund or rainy day fund and how you might use a strategy incorporating all three for an affordable sense of assurance for you and your family in the event of a crisis.

With recent discussions around the failing of the social security trust after 2035, these strategies might also be prudent for those nearing retirement, or those whose retirement saving strategies might be less than adequate.

Finally, we’ll explore how the expertise of a skilled financial planner can help. With their insights, you can find a solid grasp of your financial situation, understand your insurance coverages and create an invaluable emergency fund as you prepare for the future.

Disability Insurance

Disability insurance, as the name suggests, provides financial assurance if illness or non-work injury keeps you from working or results in excessive time off or job loss. The distinction between disability insurance and worker’s compensation insurance is important to point out as worker’s compensation benefits apply only to on-the-job injuries. Disability insurance covers qualifying injury or illness sustained outside of work. Directly work-related injuries are most often covered by worker’s compensation policies and not disability insurance.

Disability insurance policies provide a percentage of your income to you for a fixed period, or until you can return to work or secure another job. Employers may offer disability coverage as part of an employee benefits package, which is selected and administered by the employer, or you have the option for privately funded coverage which you can obtain and manage yourself. A few states require companies to provide short-term disability coverage to employees, either through a private carrier or state sponsored plan.

The two most common types of disability insurance available are short-term disability insurance and long-term. While both policy types may have specific limits or maximum benefits, short-term benefits cover temporary disabilities and provide income replacement of 60-70% of an employee’s disability income for a period of, often, up to six months. Long term disability extends this coverage somewhat, covering somewhere between 40-60% of pre-disability income.

Prices for disability insurance vary, based on policy terms, an individual’s age, health or occupation. In the case of employee provided coverage, the insurance may be wholly or partially subsidized by the employer. Major carriers offer various pricing structures, so if you are opting for privately funded or supplemental disability insurance, it’s wise to obtain quotes from several carriers, comparing coverage options, pricing, policy terms and features or riders.

Independent insurance agents, brokers and some financial advisors can help navigate pricing and policies to find coverage which will reasonably and adequately protect you and your family should you suffer a disabling event. Cost for disability coverage does vary for the reasons mentioned and for features provided. Disability insurance premiums generally range from 1% to 3% of an individual’s annual income.

The key advantage of privately funded disability insurance is portability. Employee coverage can change or be discontinued, for any reason, by an employer, leaving you with gaps or an absence of coverage. In the event you are fired or laid off, you may have the option to convert your plan to an individual policy but are again subject to the employer’s discretion and policy options. Private policies, by comparison, offer continuity and stability as coverage is maintained as long as premiums are paid.

Tax implications for both employee funded and privately sourced disability insurance will also vary. If an employer pays the disability insurance premium, in part or in full, the benefits received are generally considered taxable income. In contrast, if privately funded disability insurance premiums are paid with after-tax dollars, the benefits received in the event of a qualifying event are typically tax-free. Remember, this tax benefit relates directly to the dollars used to cover premiums; if you use pre-tax dollars like a flexible spending account or cafeteria plan, you may be liable for taxes on received benefits.

Disability insurance premiums may be deductible as a business expense on your state and federal income tax returns, reducing your overall taxable income. It is important to understand the specific terms and conditions of your policy coverage as well as regulations and laws guided taxable income in your state. A qualified accountant or financial advisor can provide more details as it pertains to federal and state tax codes for disability insurance premiums.

A few other less common disability insurance coverage options are also available, including:

  • High-Limit Coverages for individuals with high incomes
  • Own-occupation coverage protecting an individual’s ability to work in one’s specific occupation
  • Business Overhead Expense Insurance to cover ongoing business expenses for small businesses and the self-employed; and
  • Key Person Disability Insurance designed to protect businesses and organizations from the financial impacts of disabilities or incidents affecting key personnel.

When considering any type of disability insurance as a supplement to your disaster preparedness strategy, it’s wise to consult with a specialized disability insurance broker, a financial planner or investment manager who knows your financial situation and can advise on the types of coverage you might purchase to provide adequate protection for your specific needs and assets without overpaying.

Unemployment Insurance

Now, let’s get into unemployment insurance. Many of us got familiar with jobless benefits or unemployment insurance during the pandemic. Or, we may have, at a point in our career trajectory, contacted the unemployment insurance office in our home state. It is widely known and discussed how ridiculously inadequate unemployment benefits are in the context of personal expenses.

Before the pandemic (January 2020), weekly benefits were replacing less than half of average wages. In some states benefits topped out at less than $275 per week – equal to less than $7 an hour. According to research by the Economic Policy Institute domestic unemployment insurance benefits in the United States were among the shortest term and reached the least number of unemployed workers anywhere in the developed world. In the absence of federal standards, individual states also dictate a maximum benefit duration, 26 weeks in most states, which falls well below international norms. The National Employment Law Project found that, as of 2020, 10 states were providing fewer than 26 weeks of benefits with two states offering as few as 12 weeks. In several of those states, fewer than one in six workers were able to claim even that short span of benefits. Washington State, for example, maintains a maximum benefit (of this writing) of $999 per week, for a maximum duration of 26 weeks, with potential extensions triggered during periods of high unemployment. State-funded benefits in Oregon, for example, are available for up to 26 weeks with the maximum weekly benefit, as of this writing, being $783 per week.

Compare those benefits and duration potential against your mortgage, gas, groceries and other expenses and see how far that might get you today. Even with careful financial planning, budget adherence and a strictly ramen diet, the maximum benefit from Washington State won’t come close to meeting average monthly expenses without a supplement, considering the monthly mortgage payment for a “typical” Seattle home, according to a 2022 Redfin report, was $5,133, up from $3,525 in October of 2021 and well before the recent spate of interest rate hikes.

With the average length of a job search in 2023 taking anywhere from 5 to 7 months, twelve to twenty-six (or even twenty-eight) weeks of unemployment assistance benefits will assuredly deplete resources, tap your savings and stress your finances even in the best of unprepared scenarios. Private or supplemental unemployment relief insurance can be an option although coverage isn’t widely available and often requires very specific eligibility criteria. So, financial planning, preparedness and budget strategies all make good sense, with diligent and calculated savings for the creation and sustainable, inflationary maintenance of an emergency fund.

Emergency Funds

The Financial Industry Regulatory Authority (FINRA) estimates that just 46% of Americans have three months of living expenses set aside for a rainy-day or emergency fund. Setting aside resources to cover unexpected expenses or income disruptions is critical for continual peace of mind and the assurance that your family is protected from the unforeseen. A financial buffer or emergency fund supports you in the event of more than just job loss. Natural disasters, major home repairs and other calamities can also keep you from working, or can require significant out-of-pocket costs, which might otherwise need to be paid with credit cards, personal loans or other forms of high-interest debt. Emergency funds also help maintain your long range investment strategies, allowing you to meet expenses without having to liquidate or reallocate assets.

Building an emergency fund lets you avoid relying on credit cards, consumer credit or loans to cover immediate expenses like housing, utilities, groceries and transportation. Financial planning specialists recommend anywhere from three to six months of living expenses saved for an emergency fund. These expenses are, of course, unique and personal to your situation. Ideally, you’ll start with a financial plan, estimate your overall monthly expenses and create a budget. Get a big-picture perspective of your overall expenses. Identify in the plan where you can reduce spending to reallocate funds to emergency savings. Once you’ve detailed your expenses and budget, consider setting up automatic transfers from your checking account to your designated emergency fund account. Look for additional opportunities to fund this account, like the allocation of tax refunds and bonuses or reallocating discretionary income towards the fund.

Your emergency fund should be accessible and liquid. While a savings account can have a significantly lower yield than other investments, the funds are immediately available, generally low-risk and, if saved in a bank or other established financial institution, protected by the Federal Deposit Insurance Corporation (FDIC). Other options for relatively liquid assets with slightly higher interest rates, include certificates of deposit (CDs) or in some cases timed U.S. Treasury bills. A skilled financial planner can help you time the CDs or Treasury bills in a “laddered” approach and might have additional ideas for low-risk, liquid asset allocations. Consulting with a planner to maximize your disaster planning efforts, resource and investment management is a prudent idea.

Prepare with a Financial Planner

We know that unemployment or job loss insurance can be inadequate. We also know that in uncertain times with volatile job markets we need some protection for potential job loss and disaster. Disability insurance works to protect us if we’re injured and unable to work, but how do we coordinate this and create a sufficient emergency fund? We can budget, plan and allocate on our own. We can also enlist the help and support of a qualified financial planner.

Financial planners are a terrific resource for more than just investment management. When it comes to planning, budgets and resource allocation, a skilled planner provides perspective. They can also uncover opportunities for saving, guiding you in building financial strategies that support a rainy day fund while maintaining the quality of life you value and enjoy.

Many financial planners, in addition to operating as fiduciaries, are also licensed to sell insurance in their home states. Insurance licensure and insights into insurance policy structures, premiums and requirements lend you a unique advantage when shopping for disability insurance policies or other insurance coverage. With knowledge of your personal assets and obligations, a skilled financial planner and advisor will ensure you have adequate coverage for your specific financial situation without paying out too much in premiums. It’s a fine balance at times, seeing that your insurance will protect you fully when the time comes. You can’t always count on an insurance broker as they often receive commission for selling particular policies regardless of whether they’re a fit for you. When you can, it makes sense to consult the expertise and insights of your financial planner when shopping for policies. Their insights may prove invaluable.

Experience Disaster Financial Preparedness

“Those who fail to prepare,” as the old saying goes, “prepare to fail.” As professionals, providers, caregivers, employers or parents, our business and families count on us to plan accordingly. We simply can’t fail. Planning for emergencies with a safety net fund will ensure that, even with state unemployment benefits, you can weather any layoff or downturn in the job market. Adequate disability insurance benefits will also provide a degree of assurance in the event of injury or accident.

It doesn’t take a whole lot of effort to ensure you’re protected for a rainy day. It does get a whole lot easier enlisting the objective insights of a financial planning professional. In any event, while we don’t know what the future holds, we can sleep better knowing that we can and are prepared for the unexpected, protecting our loved ones with a little budgeting, planning and preparedness.


The information in this article is not intended as tax, accounting, or legal advice. Read the full disclaimer here.