Last month I sat across from a Scottsdale couple—both 47, both professionals, combined income pushing $185,000 a year—and watched the color drain from the husband’s face.
We were reviewing their financial picture. Life insurance? Solid. Retirement contributions? On track. Emergency fund? Three months covered.
Then I asked about disability insurance.
“We’ve got that through work,” he said. “Pretty sure we’re covered.”
So we pulled up his benefits summary.
His employer-provided long-term disability would replace about 60% of his base salary. Sounds decent, right? Here’s what he didn’t know: that benefit is taxable because his employer pays the premium. After federal and state taxes, his actual take-home replacement would be closer to 42% of what he currently brings home.
On a $110,000 salary, that’s roughly $3,850 a month instead of $6,900.
A $3,050 gap. Every single month. For as long as the disability lasts.
His wife sat there doing the math in her head—mortgage, car payments, their daughter’s college fund contributions, the basics of keeping a household running in the East Valley. She didn’t need to say anything. The numbers spoke loud enough.
Question 1: What’s the Real Likelihood You’ll Become Disabled Before Retirement?
I used to think disability was something that happened to other people. Construction workers, maybe. Professional athletes. People in dangerous jobs.
Then I looked at the actual statistics and—honestly—I felt a little foolish.
The Social Security Administration reports that roughly 1 in 4 of today’s 20-year-olds will experience a disability lasting at least a year before they reach retirement age. And according to 2024 data from LIMRA, about 27% of American adults currently live with some form of disability.
That’s not a fringe risk. That’s nearly one in four.
And here’s the part that really surprised me: close to 90% of long-term disabilities aren’t caused by accidents. They’re caused by illness. Back problems. Cancer. Heart disease. Mental health conditions like depression and anxiety. Autoimmune disorders that creep up slowly and then, suddenly, make it impossible to do your job.
Look, I’m not telling you this because I’ve solved all of these problems for my clients in the pas, I’m telling you thins because there was a time where I didn’t take it seriously and I paid for it. I think it was around age 34—might have been 35, actually—and then something happened to me, I went out on disability at my old semiconductor and I became sidelined for 11 months.
Thankfully I recovered, but my emergency fund sure did take a step back.
Picture this: you’re a software engineer in Tempe. Or a project manager in Chandler. Or running a small business out of Gilbert. You’re not climbing telephone poles or operating heavy machinery. And yet the conditions most likely to disable you—musculoskeletal issues, cancer, neurological problems—don’t care what you do for a living.
Question 2: How Much Income Replacement Do You Actually Need?
This is where most people get it wrong.
The conventional wisdom says 60% of your income should be enough. That’s what most employer plans offer. But there are a few problems with that math—and they add up fast.
First, taxation. If your employer pays the premium for your disability coverage (which most do), then any benefits you receive are taxable income. A 60% benefit might net you 42-45% after Uncle Sam takes his cut.
Second, lifestyle creep. Most families here in the Phoenix Valley have built their lives around 100% of their income, not 60%. Mortgages, car payments, kids’ activities, contributions to retirement accounts—all of that was calculated based on what you actually earn.
Third, duration. The average long-term disability claim lasts between 2-3 years. Some last much longer. Imagine 36 months at half your normal income. Now imagine trying to maintain your retirement contributions during that time.
So what’s the right target?
I generally recommend clients aim for coverage that replaces 65-70% of their gross income through a combination of employer and individual policies. And critically—if you purchase your own supplemental policy with after-tax dollars, those benefits come to you tax-free.
The difference between $3,600 and $5,600 over a 24-month disability? That’s $48,000. Not hypothetical dollars—actual cash your family either has or doesn’t have when they need it most.
For illustrative purposes only. Hypothetical examples do not represent any specific individual’s circumstances. Actual benefits depend on policy terms, tax situation, and individual circumstances.
Question 3: What’s the Difference Between Short-Term and Long-Term Disability?
This trips people up more than almost anything else we discuss.
Short-term disability (STD) typically covers you for anywhere from a few weeks up to six months. It kicks in quickly—usually within 1-2 weeks of your disability event. The benefit amount varies, but most employer plans replace around 60-70% of your salary during this window.
Long-term disability (LTD) is where things get serious. These policies kick in after your short-term coverage ends—typically at the 90 or 180-day mark. And they can continue paying benefits for years, sometimes all the way to retirement age depending on your policy.
But here’s what I’ve seen happen—and this is important. A Mesa family a colleague of mine advises had great long-term coverage through the husband’s employer. Really solid 65% replacement all the way to age 65. What they didn’t have? Any short-term coverage. So when he had a heart attack at 52 (he’s doing fine now, by the way), they had to survive 90 days with zero income replacement.
They burned through $18,000 in savings before his LTD benefits kicked in.
Question 4: Why Does Employer-Provided Coverage Usually Fall Short?
Look, I’m not going to tell you employer coverage is worthless. It’s not. It’s actually a pretty good starting point, and—my wife still gives me grief about this—I was probably overpaying for individual coverage myself before I really understood how the pieces fit together.
But employer coverage has some significant limitations that most people don’t discover until they’re filing a claim.
Problem 1: Benefit caps. Many employer plans cap monthly benefits at $5,000 or $10,000 regardless of your actual salary.
Problem 2: Definition of disability. Most group plans use an “any occupation” definition after the first 24 months. That means if you can theoretically do any job—not your job, not a job paying similar income, but literally any job—your benefits could be terminated.
Problem 3: Portability. Change jobs? Laid off? Employer coverage typically disappears with you.
Problem 4: Taxation. Employer-paid premiums mean taxable benefits. At a marginal tax rate of 24-32%, that takes a significant bite.
The Story Nobody Wants to Tell
I want to share something personal for a minute.
Before I became a financial advisor, back when I was working as a semiconductor technician and we were clawing our way out of $42,000 in consumer debt, disability insurance was the furthest thing from my mind. We were in survival mode. Every dollar went toward getting out of that hole.
That’s when I realized something that changed how I think about financial planning.
We were one back injury away from losing everything.
I got lucky. Nothing happened.
But when I finally got serious about building our financial life—when I discovered the principles that eventually led me to this career—I understood that insurance isn’t about paying for something you hope never happens. It’s about making sure one bad break doesn’t undo years of progress.
We Can Help
Many families who’ve become clients started with just an insurance review—takes about 20-30 minutes on a Zoom call, doesn’t cost anything. We look at what you have, identify gaps, and give you options. No pressure, no sales pitch, just information so you can make smart decisions.
Not scary. Not judgmental. Just clarity.
In your first consultation, you’ll walk away with:
- A clear picture of your current coverage and any gaps
- An understanding of how employer vs. individual policies compare for your situation
- At least two specific recommendations tailored to your income and family
- A written summary you can reference later
- Clear next steps (even if that next step is “do nothing right now—you’re in good shape”)
We limit our new client consultations to 8 per month because we’d rather serve families well than rush through meetings. As of this writing, we have 3 spots remaining for January.
Okay, so you’ve got life insurance, disability insurance, and long-term care covered. But here’s the thing most families still get wrong: They’re not coordinating these pieces together. Next post: How to build a COMPLETE financial plan that actually works…
This is general information for educational purposes only and does not constitute personalized financial advice. Hypothetical examples are for illustrative purposes; actual results will vary based on individual circumstances, market conditions, and timing. Past performance does not guarantee future results. Investing involves risk, including possible loss of principal. Consult licensed professionals for your specific situation.