The connection between bankruptcy & disability: What you should know

Why do you assume people file for bankruptcy? For help after a string of poor financial choices? To get out of accrued debt? To wipe the slate clean after investments gone wrong? While all of these possibilities are valid, having a disability is actually one of the leading causes of bankruptcy.

That's right—in addition to the emotional and physical toll a disability can take, it can also lead to significant financial problems. A 2019 study points to a correlation between bankruptcy and disability. Nearly 78% of debtors surveyed cited income loss as a specific contributor to their bankruptcy, with 44% saying medical problems were the cause of that income loss. That might make you wonder: Don't employers offer short- and long-term disability coverage for that reason? While they often do, it's not an all-encompassing solution.

Disability is a broadly used term, but in the context of the Americans with Disabilities Act, it's a "physical or mental impairment that substantially limits one or more major life activities." A disabling event that keeps you from working—and collecting your usual income—can put you in a precarious financial situation. It's possible that standard health insurance, workers' compensation, short- and long-term disability coverage and basic coverage through Social Security won't fully cover your income loss. That can make paying your usual bills difficult, let alone any disability-related expenses you may have.

• Most employer-sponsored disability insurance plans only cover 40%–60% of your salary.
• In 2023, the average Social Security Disability Insurance (SSDI) benefit for a disabled worker was only $1,483 a month.
• Workers' compensation only provides coverage for time away from work if the illness or injury was directly related to work. However, just over 1% of occupational-injury cases involve missing days of work because of a work-related illness or injury.

It's easy to see how a person could tumble into significant debt—and eventual bankruptcy—if a reduction in income lasts a long time. This is why it's important to consider disability insurance coverage as part of your personal financial strategy.

Disability insurance, also called disability income insurance or DI, is a type of insurance that protects against financial loss for people who can no longer work due to a disabling sickness or injury. DI can provide short- or long-term coverage and be obtained through an employer, Social Security or financial services organizations.

Despite it being available, though, at least 51 million working adults in the U.S. do not have disability insurance aside from what's available through Social Security. This is partially because employer-provided disability insurance is not a federally required benefit. Also, many people think having a disability is unlikely for them, so they don't seek out individual supplemental disability insurance. However, these plans can bridge the gap between your coverage from other resources and the income you're used to.

In short, it's something everyone of working age should consider.

Disabling injuries and illnesses can happen to anyone at any time, even if you're healthy enough to run a marathon the day after Thanksgiving. In fact, the Social Security Administration says that one in four of today's 20-year-olds will experience a disability before reaching retirement. If you or the people in your household would suffer financially without your income, you should consider factoring disability coverage into your larger financial road map—especially if your employer does not offer DI.

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What you need to know about disability insurance riders

Prepare for the future by learning more about long-term disability insurance and how you can customize your policy with riders to best fit your needs.

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If you choose to purchase your own supplemental disability income insurance policy, you'll want to select the best one for your situation. Non-employer-sponsored offerings require you to pay a monthly premium to an insurance company or other financial institution, much like you would for life or car insurance. Your premium is determined by factors like your age and occupation. If you become disabled, your policy would pay out a certain amount for a specified length of time (the term) or until you are able to return to work.

Financial services organizations usually have several plans with different protection options. Here's a rundown of common policy features to help you make sure the plan you choose has what you need:

• Noncancelable. The insurance company can't terminate your policy except in cases where you don't pay your premium. This feature allows you to renew without an increase in your monthly premium or a reduction in your benefits.
• Guaranteed renewable. You have the right to renew the policy with the same benefits without cancellation. However, the insurance company may increase your premiums, but only if it does so for all policyholders in the same rating class as you.
• Coordination of benefits. The benefit amount you receive from the insurance company may depend on the coverage you have from the other resources mentioned. For example, a policy may specify a maximum amount you can collect from all your policies combined.
• Additional purchase options. You can buy more disability coverage at a later time.
• Cost of living adjustment. Your disability benefits may increase based on an increased cost of living as measured by the Consumer Price Index. Note that this may be a rider that involves you paying a higher premium.
• Return of premium. The company may refund part of your payments if you didn't make any claims for a specified period of time.
• Waiver of premium. You don't pay premiums on the policy after you've been disabled for a certain number of days.
• Residual or partial disability. If you're still partially disabled but return to work part-time, this rider option could allow you to continue to collect a portion of your policy benefit.

Depending on the features you select, your premium could go up, so you'll want to weigh the costs and benefits for your unique situation.

No one plans on becoming disabled, and no one wants to enter bankruptcy. But with the right disability insurance coverage, bankruptcy and disability don't have to be two sides of the same coin.

To get expert help incorporating the monthly premiums of disability insurance into your larger financial strategy, contact a local Thrivent advisor. They can help you review options and crunch numbers.