Disability Income Planning
Disability income planning generally focuses on replacing lost work earnings. Many employer-sponsored long-term disability (LTD) plans replace 60% of salary, which may initially appear sufficient. Consumers and financial advisors often evaluate whether this reduced income level would still support the household’s expected monthly expenses. Some expenses may decrease during a period of disability, such as commuting costs and discretionary spending. If a gap remains between expected income and expected expenses, the consumer may purchase supplemental individual disability coverage or maintain emergency savings to address the shortfall.
At this point, many consumers believe they have adequately prepared for a potential disability. However, there is another important financial consideration that is frequently overlooked: the loss of employer-sponsored benefits following termination of employment. Most employers have policies governing how long an employee may remain employed while unable to work due to illness or injury. In practice, disabled employees may be terminated after as little as six months away from work, sometimes less. Once employment ends, employer-sponsored health insurance coverage generally ends as well.
A Forgotten Cost
This loss of employer-sponsored medical coverage can create a significant financial burden at a time when income has already been reduced. An individual who was previously paying only a portion of employer-sponsored health insurance premiums may suddenly become responsible for the full cost of coverage through COBRA, a marketplace plan, or another private insurance option.
The cost difference can be substantial. According to the 2025 KFF Employer Health Benefits Survey, the average annual premium for employer-sponsored health insurance was $9,325 for single coverage and $26,993 for family coverage. Employees are typically paid only a portion of these amounts while actively employed. (KFF) After termination of employment, however, the disabled individual may become responsible for the entire premium amount. Under COBRA continuation coverage rules, plans may generally charge up to 102% of the total cost of coverage, including the portion previously paid by the employer. (DOL)
For many households, this represents a dramatic increase in monthly expenses at precisely the wrong time. A family that was accustomed to paying only the employee share of premiums while working may suddenly face monthly insurance costs measured in hundreds or even thousands of dollars.
Importantly, these increased expenses often arise at the same time medical needs are increasing. Prescription drug costs, specialist visits, ongoing treatment, rehabilitation expenses, and other healthcare costs may become more significant during a period of long-term disability. In many cases, the disabled individual is not only earning less income, but also facing higher healthcare-related expenses than before the disability occurred.
What to Consider
This issue deserves greater attention in disability income planning. A taxable employer-provided LTD benefit replacing 60% of salary may not provide an adequate level of protection once the loss of employer-sponsored benefits is considered. Depending on how the LTD coverage is structured, taxes may further reduce the amount of income actually received by the disabled employee.
Consumers and advisors should therefore evaluate not only how much income will be replaced during disability, but also how household expenses may change if employment and employer-sponsored benefits terminate during the disability period. Disability planning should account for the potential cost of maintaining health insurance coverage after employment ends, particularly for individuals and families with ongoing medical needs. If the disabled individual qualifies for Social Security Disability benefits, coverage under Medicare begins after 30 months of disability, providing at least some safety net regarding medical coverage in cases of severe disability lasting longer than two and a half years. In addition to the loss of medical coverage, significant retirement benefits may also be lost during periods of disability.
A disability reduces income, but the loss of employer-sponsored benefits can also significantly increase expenses. Effective disability income planning should consider both.
