When it comes to setting up an estate plan, many individuals think of a Last Will and Testament, Trusts and other ways to handle the distribution of their assets. However, one critical aspect often overlooked is the role of disability insurance in safeguarding your financial legacy. Disability insurance acts as a safety net that could help protect you from missing out on income during a challenging period of your life. At Priority Law, we know how crucial disability insurance benefits can be to our clients and their families. Our experienced attorneys can help integrate disability insurance into your estate plan so that your documents align with your long-term goals. You can call our office at 978-935-2000 today or book an appointment online

What You Need to Know About Disability Insurance

The Council for Disability Awareness estimates that one in four Americans is likely to become disabled at some point until they reach retirement age. For this reason, disability insurance may be something worth considering when crafting an estate plan. But what are the types of disability insurance and how does this insurance work? 

Short-Term Disability Insurance

Short-term disability insurance provides financial support for a limited period (typically three to six months). This type of insurance is crucial for covering immediate expenses should you become unable to work due to illness or injury. Without it, you may need to dip into savings or even sell your assets meant for your heirs to cover day-to-day expenses, medical bills, or debts.

Long-Term Disability Insurance

Long-term disability insurance picks up where short-term leaves off, offering financial protection for extended periods – often until retirement age. This insurance is particularly important for ensuring that your long-term financial goals remain intact and complement your estate plan. It helps maintain your family’s standard of living and save the assets you are preserving for future generations, all without the need to prematurely access or alter your estate.

How Disability Insurance Works

Disability insurance policies typically replace a percentage of your income, usually between 50% and 70%, if you are unable to work due to a qualifying disability. The specifics, such as the definition of disability, waiting periods before benefits begin, and the duration of coverage, vary among policies. It’s vital to understand these details to choose the right coverage for your needs, so you might need a consultation with an attorney. 

One key factor to consider is whether the policy offers “own occupation” coverage, which pays benefits if you are unable to perform your specific job, or “any occupation” coverage, which requires that you be unable to perform any job suitable for your education and experience. For those with specialized skills or professions, “own occupation” coverage may be especially critical.

Our experienced estate planning attorneys at Priority Law can explain your coverage options and their role in your estate planning strategy. 

The Role of Disability Insurance in Estate Planning

Incorporating disability insurance into your estate plan offers several advantages, including:

  • Income replacement. By replacing a portion of your income, disability insurance ensures that your family can maintain their current standard of living without tapping into the estate you have worked hard to build for them.
  • Asset protection. Insurance benefits can help cover living expenses and medical costs, reducing the need to liquidate investments or savings that are part of your estate plan.
  • Tax advantages. Disability insurance benefits are generally tax-free if you pay the premiums with after-tax dollars. This tax-free income stream can be a crucial component of your estate planning strategy. However, individuals must report as income any amounts they receive for their disability through an accident/health insurance plan paid for by their employer, according to the Internal Revenue Service (IRS)
  • Flexibility. A well-structured estate plan, complemented by disability insurance, can provide the flexibility needed to adapt to changing financial circumstances without compromising your long-term goals.

How to Integrate Disability Insurance Into Your Estate Plan?

Incorporating disability insurance into your estate plan ensures that your plan is robust, adaptable, and truly comprehensive. Here are steps to take to make that happen:

  1. Coordinate with other estate planning tools. First and foremost, take the time to ensure your disability insurance complements other components of your estate plan, such as life insurance, wills, and trusts. For example, if you expect to receive benefits from disability benefits, you may need a separate trust to have greater control over disability insurance payouts when the time comes. 
  2. Consider a power of attorney. A durable power of attorney for finances can be instrumental if you become incapacitated. This appointed person can manage your disability benefits along with your other financial affairs.
  3. Plan for tax implications. When disability insurance is funded with pre-tax dollars, disability benefit payouts will be subject to taxation. That is why you might need to consult with an attorney to structure your insurance in a way that minimizes tax liabilities for you and your heirs.
  4. Review your estate plan regularly. As life changes, so do your estate planning needs. Regular reviews will help you adjust your disability insurance coverage – and also your estate plan – as necessary.

Legal counsel can be invaluable in navigating the complex interplay between disability insurance and estate planning. Since every individual’s situation is unique, consider contacting an experienced estate planning attorney to provide tailored advice based on your specific circumstances, goals, and concerns. When crafting an estate plan, your attorney will explain the legal aspects of disability insurance and how it fits within your broader plan. In addition, an estate planning attorney can help you coordinate your disability insurance with other assets to ensure your plan works as a cohesive whole.

Need Help Integrating Disability Insurance Into Your Estate Plan?

Planning for unforeseen life events that have the potential to alter your life is an important decision you shouldn’t take lightly. While disability insurance can complement your estate plan, you might consider enlisting an experienced estate planning attorney’s help to ensure that your financial rights are protected in the event of a disability. Our attorneys at Priority Law can assist you with your estate planning needs while making sure that disability insurance remains an integral part of your estate plan. Call 978-935-2000 to schedule a consultation today to learn more about your estate planning options.