The role of disability insurance in divorce planning

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 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. When dividing assets during a divorce, it is important to consider how disability benefits might be classified as marital property.

Income and child support are important parts of a divorce agreement

For obvious reasons, it's essential to evaluate all your financial responsibilities at the beginning of the divorce process. Following a divorce, the spouse with the higher income typically must provide their former spouse alimony and child support payments. 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.

Additionally, social security disability benefits may be impacted by divorce, including the division of benefits and their classification as marital property in certain circumstances. SSDI payments can be considered in alimony calculations, potentially affecting the amount you need to pay.¹

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. 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 f 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, making 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 years.²

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.³Disability policies are highly customized contracts, and your actual cost will vary based on several 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 involving spousal support*

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 left 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 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 the policy will cover her $5,000 monthly payments if she becomes ill, and she can 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 of your disability benefit income. Whether they can access this income will depend on several factors. For example, certain federal disability benefits, like military disability benefits, cannot be accessed by a former spouse.⁴ However, 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. Whether disability benefits are considered marital, community or separate property.⁶

2. When the disability benefits were earned or became payable (during the marriage or not), including the duration of the marriage.⁷

3. The purpose of the disability payments.⁸

4. The financial needs and earning capacities of both spouses.⁹

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.