In Regards To Cash Flow A Firm Should Ideally Have Does Short or Long-Term Disability Insurance Provide Greater Value?

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Does Short or Long-Term Disability Insurance Provide Greater Value?

Many employers offer both short-term and long-term disability insurance as part of their employee benefits program. Perhaps for this reason, when consumers want to buy their own individual cover, it is common for them to look for both short-term and long-term policies – but which should be considered more important?

Following the basic principles of financial planning and risk management, insurance is generally recommended to protect against risks that rarely occur but could potentially create serious financial difficulties when they do occur. Suffering a debilitating injury or illness is obviously a prime example of such a risk, which is why maintaining disability insurance is a responsible form of protection.

For many individuals, losing one month of income could be the difference between meeting or failing to meet current financial obligations. However, regardless of one’s current financial position, it is clear that a two-year loss of income would be much more difficult than a two-month loss of income. While noting that a one or two month loss of income may not be easy to bear, it does not necessarily create a severe enough financial hardship to require insurance, especially if the amount of money that can be allocated to this insurance is limited.

To put things into perspective, imagine a worker earning $5,000 a month – if he/she suffers a disability that lasts 3 months, the total loss of income is $15,000. If that same person had a disability for 3 years, the total loss of income would be $180,000. It is clear that the financial impact and loss of income is much greater for long-term disabilities than for short-term ones.

Most individual long-term disability insurance policies have a 90-day waiting period that must first be satisfied before benefits begin to be paid. Through various ways of maintaining liquid assets, an individual could self-insure for a three-month waiting period and maintain insurance to protect against a larger, more significant risk of long-term injury or illness.

Ideally, someone who is unable to self-insure for the first three months should have short-term disability insurance to provide income replacement during the elimination period. However, in most cases the amount of available cash flow that can be used for insurance is limited. In these cases it may be best to consider protection against the more critical risk of long-term loss of income.

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