Episode 521 – Importance of Disability Insurance

Welcome to the Your Life Your Wealth podcast with John Walker and Jason O’Meara, helping you find clarity and comfort for your life and wealth.

John Walker
Hey, welcome to the Your Life Your Wealth podcast. I’m John Walker, Regional Vice President at Mercer Advisors.

Jason O’Meara
And I’m Jason O’Meara, CERTIFIED FINANCIAL PLANNER™ and Wealth Advisor here at Mercer.

John Walker
We’re thrilled to have you back today, and we’re gonna talk about a really important critical financial safety net that we really need to make sure is a part of any good financial plan. And that’s disability insurance, Jason. Even as you build your wealth, right, maintaining this type of coverage or making sure that your income and assets are protected while you’re working is really, really vital to make sure that, you know, all the hard work you’ve done doesn’t become unhinged by an unexpected health event.

Jason O’Meara
What we see happens all the time is people always take into consideration life insurance, right? Everybody gets their life insurance in order because if you die, you know, your family still needs to be protected, still needs that income, right? But what we often find is people don’t like thinking about bad things happening to themselves, right?

So, they don’t take into consideration what happens if I just can’t work due to an illness or an injury. And to be honest with you, we’ve seen a lot of times that’s kind of worse. If you pass away, you don’t need food, you don’t need lights, you don’t need these things, right? But if you are alive and injured or ill, there’s other costs that are associated with it, and then you can’t work on top of that. You’re 5 times more likely to become disabled in a given year than you are to die in a given year.

John Walker
Yeah, the statistics really bear that out. Over 25% of Americans between the ages of 45 to 64 live with a disability, and the average long-term claim lasts nearly three years. So a disability in those peak earning years or in your 50s or early 60s can really permanently alter your retirement outcomes, right, it can really change the trajectory of your plan. And while things like SSDI provide, you know, a modicum of baseline support, it rarely covers, you know, maybe the lifestyle that you’ve been accustomed to or allows you to, you know, continue funding the savings goals that you had maybe prior to that health event, right?

So, Jason, let’s talk a little bit about that, right? There’s different types of disability insurance that may help protect your income. One is short-term disability insurance, which really is only designed to cover usually up to about 6 months and even then doesn’t fulfill typically your entire income, right? That typically kicks in for things like surgeries, temporary conditions, maybe positive things like pregnancy, right? It’s not always bad things, things that prevent you from working for a short period of time with the understanding that you’ll be returning reasonably, you know, in short order.

Jason O’Meara
It usually covers about 60% of your income, right? That’s the one thing to think about, right? So, most people get their short, their short term and long term through their company, and you need to consider certain things. Is this going to be enough? And like you said, John, it’s short term. It’s 6 months, right? A family member of mine fell off a ladder and hurt his back, and he couldn’t work for a couple of months while he recovered, right? He does a physical job on his feet. So, his short-term disability covered that, and he wound up going back to work and everything was fine and it was good.

Where the issue comes, right, is what happens when you go beyond that six months, right? And what happens is there’s another type of disability insurance called long-term disability insurance. And that typically kicks in after that six-month period or nine-month period, whatever your short-term disability period is, after that long term kicks in. And that’s for your longer term — it’s not just a clever name, right? It’s for your longer-term illness or disability. Some of those are 5, 10 years, some of them run all the way out until retirement. Those are serious, you know, or reoccurring situations that really need the protection, and that’s your biggest concern.

John Walker
And it really is something that remains a critical part of financial planning here and going forward because the stats are really sobering. 28% of Americans between the ages of 45 and 64 have a disability. Right? And you mentioned, you know, there are certain high-risk occupations, right? People do things that maybe expose them to more risk, right? They might work in a dangerous environment. But it can affect anyone at any stage of their career, right? You don’t have to be a deep sea fisherman or one of the most dangerous jobs in the world to have something like this affect you.

The most common causes are things like musculoskeletal disorders, mental health conditions, nervous system disorders, a lot of circulatory diseases, heart disease, stroke, cancer, right? These things happen and they don’t discriminate, right? They affect people across all industries, all income levels, and the impact can be substantial. The average long-term disability claim in the United States lasts 34.5 months. That’s almost three years you’d be facing without income, without some sort of protection in place.

Jason O’Meara
And I think the thing that shocked me the most when I saw these statistics is injuries only make up about 7%. So, most of the reasons that people go on some sort of disability is due to something health related, which shocked me. I honestly expected it to be higher for injuries, right? Car accidents, something, right? But the reality of it is no.

John Walker
And I think that’s a really common misconception. I certainly agree with you. That would have been my bias going into this, thinking, yeah, it comes from really something that you just couldn’t have planned for. And it does. It’s just not what you think, right? It’s often things that seem less, you know, jerky, less dramatic, right? It’s things that creep up on you and that maybe you didn’t have any control over, and, you know, it’s not you getting injured by a tool at work. It’s something else.

And so, with all of that as the context, Jason, it really is important that you review and likely maintain some sort of disability insurance coverage while you’re working, right? It’s critical that you protect your earnings during your peak years, which for most folks are in their 50s and 60s as you’re approaching retirement. You know, intuitively that makes sense to us as we are reaching the latter stages of our career. That’s typically when we’re the most well compensated for our experience and knowledge. And so, you know, you don’t want to see a three-year window deplete or derail all of your retirement or savings plans to ensure that you can maintain your lifestyle.

Jason O’Meara
That’s huge, right? Because again, there’s no loans for retirement. If you’re not earning during those years, that could be a real problem, right? But also, what about the other side of that? You have a young family, you have young kids, right? Your income is vital at that time too, right? Not just for saving for the future but also taking care of your kids. Now, if something were to happen to you and all of a sudden now you can’t bring in an income, how are you gonna, you know, send your kids to school? So, it’s important. And again, it’s probably the most overlooked type of insurance.

John Walker
Yeah, I mean, you’re right, ensuring your family’s financial security, making sure that as you mentioned, things like education expenses, mortgage payments, the daily costs of living, right? You know, utilities, those things don’t stop, right? Even if you have an injury or a health event or a long-term situation, life continues to go on around you and so if people are relying on you, you want to make sure that they remain protected.

It’s really important too, Jason, that if you do have some sort of preexisting condition, that makes this even more challenging, right? Once you develop some sort of health issue, it becomes often extremely difficult or prohibitively expensive to replace your income like this, right? So, making sure that your existing coverage is maintained is often far, far easier than trying to secure some sort of new coverage or protection.

Jason O’Meara
Which is also why it’s important to do this, have this conversation early, right? Think about this early because just like everything else, just like every other type of health or life insurance, if you’re healthy now, that doesn’t mean you’re going to be healthy in 10 years, and you can’t wait until you’re not healthy to get this coverage. So, it’s important that you look at this early and you maintain it, and different professions require different amounts, right? So, the more you work with your hands, the harder it’s going to be to get disability insurance because greater risk of injury, greater risk of disability occurring is going to cause harder underwriting.

But the important thing is you’ve got to look beyond just your monthly income replacement. Disability insurance often includes rehabilitation services, return to work programs, and other support like facilities and recovery programs to help you get off of the disability benefit when that time comes. It’s important to look beyond just what does this offer from an income standpoint. Are there other benefits?

John Walker
As we’re helping families navigate the planning process, Jason, and we’re thinking through what role does this play, right? We have to evaluate if this type of coverage makes sense. Now there is Social Security disability insurance that people are eligible for, and it really should be viewed as a baseline protection, right? It rarely covers all expenses for a family. The average benefit for SSDI in 2026 is $1,630 a month. There’s a five-month waiting period. And there’s a maximum annual amount that it pays out, right? And so, when you’re facing increased medical expenses, maintaining your family’s needs, that rarely replaces most Americans’ annual income. And so, you really need to evaluate where you can support and supplement this because losing your income could just massively unhinge a plan.

So, thinking through folks that really need to evaluate this — if you are a business owner, right, you really need to ensure that the impact of a health event for you could be crucial to the business as a whole, right? It’s not just even your own family. You could be responsible for countless workers who rely on you for helping lead an organization. It’s about maintaining that business continuity, to make sure that your company’s value is maintained, that operations can continue, right? You really need to make sure that you have the right protections in place.

Jason O’Meara
And also if you’re a high income earning professional, think doctors or lawyers or whatnot, right, your income is going to be significantly above the Social Security disability income limit, right? So, you may want to look outside of your employer. You’re able to look at some private disability insurance through some of the insurance providers out there. That’s a good option because if you leave that particular company and go to another one, it follows you. It doesn’t, you don’t have to stop and restart. So, if you develop some sort of pre-existing condition, now you don’t have to worry about requalifying. It’s a good thing for people to evaluate. Again, like everything in life, you don’t have to do it, but you should at least evaluate it, and that’s one that you should at least evaluate.

John Walker: Absolutely. And you mention in there, right, there are different types of coverages available. There is private disability insurance. Many companies offer employer sponsored plans, and that is often the most affordable income protection you might be able to get yourself. So, you know, employer group disability insurance plans can really offer good value, right? The average cost is usually somewhere between $30 to $60 a month. Don’t overlook that.

I will tell you in evaluating our benefits, it’s something that I’m often quick to gloss over and it’s really, really important that you take a moment and think, OK, how can this support my family in the event that something happens to me? And it really is, you know, like most things — if once you get accustomed to it or build it into your spending plan, you really start to forget about it, and it’s so vital because, particularly if your family relies on you for that income, right, you want to make sure that you are protected.

And certainly, Jason, from a timing perspective, I mean, I think it’s hopefully by now folks are hearing, I think this is an important evaluation at any time you’re working, but certainly the closer you get to retirement, it really becomes even more critical to protect those final earning years because the impact at that critical moment of losing an income — that could really unhinge a plan.

Jason O’Meara
Right, and that’s very true. And then when you gotta think about this though — if I’m sitting in your shoes, I’m going to sit here and think, OK, so I’m going to go look at a disability policy. How can I tell what makes sense as far as the policy is concerned, because every company is going to be slightly different, right? And there’s a couple of things I want people to consider and just understand and look for in these types of policies.

One is definition of occupation, right? Is it my own occupation? So, you know, I’m a wealth adviser. Is my definition of disability that I cannot perform the functions of a wealth advisor? And if so, then that meets the definition of disabled and my benefits kick in. Or do I want to look at things and say, if you look at it and it says any occupation, which means you can’t perform the functions of any job — so if I can’t perform the functions of my own occupation, but I can scan groceries at the grocery store, my disability policy may say you can get some work, go do that, right?

So understanding definition of occupation. But more important is tax implications, right? If you are paying the premium — in other words, the money comes out of your pocket to pay that premium — your benefits are tax-free. You don’t pay income tax on the benefit if you’re paying the premium, so you may not need as much coverage because you’re not paying tax on it, right? You only need to insure your after-tax dollars, whereas if your employer is paying the premium, the income is taxable, so you need to make sure you have the right amount of coverage.

Yeah, that’s probably, honestly, that’s the thing I see people trip over the most when it comes to disability insurance — is the taxability — where they either have too much coverage and we can scale it back a little bit, or they don’t have enough because their employer is paying the premium and they realize the insurance amount is their after-tax dollars, but they’re getting it pre-taxed. So, it’s one of those things where you can trip over. Make sure that you’re working with a qualified professional to help understand those two definitions.

John Walker
Yeah, I think that’s a really important point, Jason, right? So, as you’re evaluating your needs, you have to look at it as we do most things — through the lens of the entirety of the plan, right? How do you factor in the duration of how long you’ll need your income to be replaced? Have you accounted for the inflationary pressures of healthcare? What are the tax consequences and implications, right? How is this going to be received? What other obligations do you have? Is it just basic living expenses, or do you have to think about dependents, and other folks that rely on you for support, your family and obligations you may have?

I mean, the bottom line is there are a lot of folks working in this country that have inadequate disability insurance, and it can really, really hurt your economic future and really unhinge a good plan, disrupt retirements, do things that we really want to see families avoid. So, it’s important that you get guidance around that and that any good financial plan really counts for this, right? I think it’s a very under evaluated part of the planning process.

As much as we need to focus on cash flow, portfolios, spending in retirement, keeping pace with inflation, all the things that you’ve probably thought about yourself — this is another one, a gap that you don’t want to miss, right? It’s not just modeling for the future. It’s also looking for the gaps in the plan and trying to identify how will this plan break, right? And making sure that you have solutions and at least have evaluated all of the different options that are available. It may be disability coverage. It may be something else, but having that information to know is critically important and it’s something that we want to make sure that the families we work with are protected in.

Jason O’Meara, CERTIFIED FINANCIAL PLANNER™ and Wealth Advisor here at Mercer Advisors, thanks for joining me again today, buddy.

Jason O’Meara
Of course, great conversation. Important.

John Walker
So if what Jason and I discussed today has you wondering if this is something that’s built into your plan or questioning if you are protected, we’d certainly suggest you check out a great article that one of our colleagues wrote on why disability insurance remains essential here in 2026, which you can find at merceradvisors.com under the Sharing Knowledge tab. Or you can certainly reach out to Jason and I directly via email at jwalker@merceradvisors.com or email Jason at jomeara@merceradvisors.com and we’d be happy to answer any questions that you may have. Jason, great talking with you about it. I think a really important topic.

Jason O’Meara
Great talking with you. And again, this is one of those topics that just people overlook and so it’s important to bring it to their attention.

John Walker
On behalf of Jason O’Meara, I’m John Walker. Thanks so much for listening to the Your Life Your Wealth podcast. We’ll see you next time.

Announcer: If you’re interested in learning more about applying the principles we discussed to your personal financial circumstances, please visit merceradvisors.com.

This presentation by Mercer Global Advisors Incorporated, also known as Mercer Advisors, was intended for general information purposes only. No portion of the presentation serves as the receipt of or as a substitute for personalized investment advice from Mercer Advisors. All expressions of opinion reflect the judgment of the speaker as of the date of recording and are subject to change.