How disability insurance can help divorce planning

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If you are currently going through a divorce or contemplating one, disability insurance can be an asset that helps you and your former spouse make the most of your situation and get on with your lives. What does disability coverage have to do with divorce? Contrary to what many might think, this coverage doesn't really protect you from disability. The primary purpose of individual disability insurance is to help protect your income and future earnings, which for most of us is our most valuable asset. That's why it's often called disability income insurance.

Income is an important part of a divorce agreement

It's essential to evaluate all your financial responsibilities at the beginning of the divorce process, for obvious reasons. Following a divorce, the spouse with the higher income typically has to provide their former spouse with payments for alimony and/or child support. Some divorce agreements also require the breadwinner to have life insurance, ensuring future alimony/child support payments for the divorced spouse's benefit if the breadwinner dies before their financial obligations end. However, many people fail to plan for situations where they are alive but can no longer work because of a disability. Long-term illnesses and disabilities are more common than death and can create substantial medical and personal expenses.

If you become disabled and can no longer earn income from employment or can no longer earn the same amount of income, you may still be required to provide spousal/child support. In order to continue making payments, you may be forced to sell your assets, including business interests, if you don't have other income. Just as worrying, if you can no longer afford child support or alimony payments, your ex's income would become the sole source of support for your dependents, leaving them with a substantial economic burden.

Long-term disability insurance helps avoid situations like this by replacing lost income if you become sick or disabled and can no longer earn the same level of income as you once did. This replacement income can let you continue making child support and alimony payments, bringing more financial confidence for you, your spouse – and your shared dependents.

How disability coverage works

The two types of disability insurance are short-term and long-term. Short-term policies are for temporary disabilities that typically last under one year. Depending on the terms of the specific policy, long-term disability insurance can provide benefits for a set period of two or more years (or until the disability resolves) or until retirement age. The money from these policies can serve as income replacement if you become severely ill or disabled. For example, they can cover monthly living expenses, settle debts, or be invested in savings.

In addition to individual disability coverage, some people may be eligible to receive disability benefits from the government through Social Security Disability Insurance (SSDI). SSDI is a component of Social Security and should not be confused with Supplemental Security Income (a program for those with limited income and resources) or individual disability insurance. Compared to disability coverage from an insurance company, SSDI benefits are far more difficult to qualify for because of the program's rigid restrictions on eligibility and definition of disability. Many applicants are denied benefits, and payments can typically be much lower than those from an individual disability policy, which can make it a less reliable source of income.

Investing in disability income protection

Unfortunately, disability is much more common than many think: An estimated 1 in 4 workers will become disabled during their working years1, and 1 in 8 will experience a long-term disability for more than five years2. Despite that surprisingly high likelihood, the cost of disability insurance can be reasonable: you can expect to pay anywhere from 1% to 3% of your annual income for a comprehensive disability policy.3 Disability policies are highly customized contracts, and your actual cost will vary based on a number of factors: your age and health, the benefit amount and benefit period (length of coverage), the definition of disability, and optional features or riders. Guardian can provide a free personalized long-term disability insurance quote to help you better understand the cost.

How a disability policy can protect you in a divorce: Two scenarios*

1. A surprise disability

Bob suddenly becomes temporarily disabled after a severe car crash and cannot work for one year. Consequently, he can't afford to pay his ex-spouse the required monthly $2,500 alimony and child support payments. However, because Bob invested in long-term disability coverage, he is entitled to start receiving a tax-free $6,000/month benefit after a 90-day waiting period. This lets him continue paying his ex-spouse monthly $2,500 support payments with $3,500 leftover for his own needs. This money replaces his lost income and helps him satisfy his support obligations during the year he can't work.

2. A financial vulnerability is uncovered

Jessica has type-2 diabetes and is a small business owner currently in the middle of a divorce. During the divorce process, a review of her finances reveals that if she became too ill to work, she would likely have to sell all her house and business to continue paying the court-ordered $5,000 monthly child support to her ex-spouse. To protect her assets and business, she purchases a long-term disability policy. This gives Jessica more financial confidence because she knows that the policy will cover her $5,000 monthly payments if she becomes ill, and she'll be able to keep her home and business. 

What if you're already receiving disability benefits during the divorce process?

No one can predict when disability will occur, and sometimes people qualify for disability payments before (or during) the divorce process. In such cases, your ex-spouse may be entitled to some or all your disability benefit income. Whether they can access this income will depend on a number of factors. For example, certain federal disability benefits, like military disability benefits, cannot be accessed by a former spouse4. But a spouse may be entitled to other disability payments like those from state or private policies. Other factors evaluated when making these determinations include5:

  1. When you became eligible to receive disability benefits
  2. How long you will receive the benefits
  3. If the amount was increased because you have minor children and
  4. If the disability payments are intended to replace future lost earnings or if they are part of a larger compensation package

However, it's important to remember that your situation and needs are unique. While the information in this article may be helpful, it does not replace the guidance of a family law attorney, who will provide guidance based on your specific situation and the applicable state laws.

Frequently asked questions about disability insurance and divorce

Is a divorced spouse entitled to disability benefits?

It depends. Whether a divorced spouse is entitled to disability benefits depends on several independent factors. For example, certain federal benefits cannot be accessed by a divorced spouse, but some benefits from state or personal disability policies can. Every case is different, so if your divorced spouse is seeking access to your disability payments, you should consult with a family law attorney who has extensive knowledge about disability insurance.

How does disability affect spousal benefits?

Disabilities can significantly impact spousal benefits. If an ex-spouse becomes disabled, they can request that the court temporarily lower their monthly spousal benefits or stop them entirely because of the financial hardship the disability caused6. However, with disability income insurance, reduced payments are less likely to occur. If you become disabled and no longer have access to your usual source(s) of income, the money from your policy can be used for spousal support payments and other dependent benefits.

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Disclaimer

References

1 Social Security Administration Fact Sheet, January 2021

2 Commissioner's Disability Insurance Tables A and C, assuming equal weights by gender and occupation class

3 Council for Disability Awareness https://disabilitycanhappen.org

4 https://www.statesidelegal.org/va-disability-compensation-and-divorce-facts-and-fallacies

5 https://mymodernlaw.com/can-ex-take-disability-income/

6 https://familylawyermagazine.com/articles/disability-insurance/

*Hypothetical examples for illustrative purposes only. An individual’s eligibility for benefits is determined on a case-by- case basis, taking into consideration the factual circumstances presented as well as the terms and conditions of his/her policy(ies).

Individual disability income products underwritten and issued by Berkshire Life Insurance Company of America (BLICOA), Pittsfield, MA. BLICOA is a wholly owned stock subsidiary of The Guardian Life Insurance Company of America (Guardian), New York, NY. Product provisions and availability may vary by state. Optional riders are available for an additional premium.

An individual's eligibility for benefits is determined on a case-by- case basis, taking into consideration the factual circumstances presented as well as the terms and conditions of his/her policy(ies).

Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

Links to external sites are provided for your convenience in locating related information and services. Guardian, its subsidiaries, agents and employees expressly disclaim any responsibility for and do not maintain, control, recommend, or endorse third-party sites, organizations, products, or services and make no representation as to the completeness, suitability, or quality thereof.

2022-140237  20240731