Wednesday, May 8, 2013

California Short Term Disability - Is it Enough Coverage?

California short term disability insurance (California SDI) pays the richest benefit of any of the state programs. Does that mean you are fully protected in case you become disabled? While it's great to have, you may regret not increasing your coverage level should you suffer a disabling injury, illness, or go out on maternity leave.

Only five states have mandated short term disability programs in force, and California's program pays the highest benefits by far. California SDI replaces up to 55% of your income, up to a cap of $987 per week as of January, 2010. While other state plans replace a higher percentage of income, their weekly cap is much lower. This means fewer California workers full under the weekly cap, and actually get to enjoy the full 55% income replacement.

Does this mean you should feel secure? Ask yourself this question: "Am I spending most of what I make every week, or am I banking 45% of what I earn?" If you are like most people you are spending most of what you earn, and you have very little set aside in savings. It is estimated that 60% of American households are living check to check. If you are not banking 45% of what you earn, think about this. If you become disabled, you will be slapped with a 45% pay cut.

And people with higher incomes fall into the same trap. Many times expenses rise right along with income. Anyone earning more than $93,316 annually will be subject to the cap. This means the pay cut will be more than 55%.

Furthermore, much of your spending may be fixed. You may have a mortgage, rent, car payment(s), student loan payments, credit card debt, insurance payments, etc. All of these bills stay the same; whether you are working or disabled. If you are currently spending most of what you make, and have little in savings, what will you do when your pay is cut by 45%?

This is how people get themselves into financial trouble. They live on the edge financially, and everything is fine as long as they are healthy and working. But people do get sick, and have accidents. Roughly one third of workers will suffer a disabling accident and/or illness during their lifetime. With very little money in savings, people get pushed over the edge when their income dries up. Half of all bankruptcies are triggered by health events.

California short term disability insurance is a great program for many workers who become disabled. But ask anyone who needed to use the benefit: "was it enough?" The answer will probably be "no". This is especially true for women planning a pregnancy, because she will be out of work for at least six weeks, and longer if she needs to miss work before delivery, or take extra time to bond with her baby.

If you are concerned about staying solvent in the event of a disability, consider purchasing supplemental short term disability insurance while you are still healthy, and before getting pregnant. These policies will pay an additional benefit should you become disabled, and help close the gap in your California short term disability insurance coverage.

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