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Financial Planning Competency Handbook, 2nd Edition by CFP Board

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CHAPTER 23 Disability Income Insurance (Individual)

Dave Yeske, DBA, CFP®

Golden Gate University

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The taxability of disability income benefits can be affected by tax elections made with respect to payment of premiums (tax planning). Disability insurance provides income replacement that helps to ensure that a retirement plan will be successful (retirement saving and income planning), and is a fundamental tool of risk management (risk management and insurance planning).

INTRODUCTION

According to the Social Security Administration, more than one in four of today’s 20-year-olds will become disabled before they retire.1 This is vastly greater than the number of premature deaths that will occur over that same period and highlights the importance of planning for income protection in the event of a disability. While only those with financial dependents generally have a life insurance need, everyone who depends on earnings to meet their spending needs faces the risk of income loss due to disability. While disability benefits are provided by Social Security under the Social Security Disability Income (SSDI) program, and five states and one commonwealth provide short-term state disability benefits meant to bridge the gap to SSDI, most individuals require additional sources of income replacement to fully meet their spending needs while disabled. And although some employers ...

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