Disability insurance — the coverage gap most households miss.

Disability insurance is the most-overlooked piece of risk management in most working-age households. Term life insurance gets attention because death is final and the marketing is constant. Disability insurance gets ignored because disability is harder to picture and harder to underwrite. But for a household whose income depends on one or two earners' continued ability to work, disability is the larger statistical risk — and the financial consequences (loss of income while expenses continue, potentially for decades) can be more damaging than a death benefit.

Short-term vs. long-term

Short-term disability (STD) usually covers up to 3–6 months and replaces 60–70% of income. Often employer-paid, automatic, and adequate for normal medical events. Long-term disability (LTD) kicks in after STD runs out and continues until retirement age (or earlier if you recover). LTD is where the coverage gaps usually hide — both in employer plans (often capped at $5,000–$10,000/month and only partially replacing high-earner income) and in the absence of any individual policy beyond what work provides.

The employer-plan gaps

Most employer LTD policies replace 60% of base salary up to a monthly cap. If your real compensation includes bonuses, commissions, or stock — and your $300,000 total income is structured as $180,000 salary + $120,000 bonus — the LTD policy covers 60% of $180,000, not 60% of $300,000. And the benefit is fully taxable if the premium is employer-paid, dropping the after-tax replacement ratio below 50% of pre-disability income. For high earners, individual coverage on top of group is the only way to close the gap.

Own-occupation vs. any-occupation

An 'own-occupation' policy pays if you cannot perform the duties of your specific occupation. A surgeon with a hand tremor who could theoretically work as a desk consultant collects on an own-occ policy. An 'any-occupation' policy pays only if you cannot perform any occupation you're reasonably qualified for — much harder to claim. Most group LTD policies are own-occ for the first two years, then switch to any-occ. High-earning professionals (physicians, surgeons, attorneys, engineers) generally want pure own-occ coverage that doesn't switch.

How much coverage to carry

The target is 60–70% of pre-disability income on an after-tax basis. If your group LTD is employer-paid (and therefore taxable to you), the gross benefit needs to be larger to net the same amount. If you supplement with an individual policy whose premiums you pay yourself, that benefit is tax-free. Mix the two to target the same after-tax replacement ratio.

The pre-65 retirement window

Disability insurance becomes less important as you approach traditional retirement age because the financial damage of becoming disabled at 62 is much smaller than at 42 (fewer remaining working years). Most individual policies cap at age 65 or 67. Plan to drop coverage as it stops being economically sensible — but not before.

Coordination with Social Security disability

SSDI is the federal disability program. It pays a fraction of working income (calculated like a Social Security retirement benefit) and has a strict definition of disability (any substantial gainful activity counts as not disabled). The wait time can be six months to two years. Individual disability policies often offset against SSDI dollar-for-dollar, but the existence of SSDI doesn't mean you can rely on it as primary coverage — most working-age claimants are denied at first application.

The household that's well-covered for death but not disability has the insurance equation backwards. Fix the order.