Pre-Disability Earnings
Categories: Accounting
Everything was going great for Marjorie until she slipped on a banana peel walking home from work one day and seriously screwed up her back. At first she was super stressed, wondering how she was going to make ends meet since she couldn’t work anymore, but then she remembered she has disability insurance. Disability insurance makes sure we’ve still got money coming in even if we’ve become seriously injured or disabled, and the insurance companies figure out how much they’ll pay us based on our pre-disability earnings.
“Pre-disability earnings” are exactly what they sound like: our earnings prior to our disability. There are a couple caveats, though. First, those earnings include our salary and personal retirement contributions only. Bonuses, OT, commissions, etc. don’t count, nor do any contributions our employer was making to our 401(k) on our behalf. And second, most disability insurance companies will only pay us a portion of our pre-disability earnings, not the whole thing. So if Marjorie was making $100,000 a year, and her insurance policy has a 75% payout, then they’re only going to be sending her $75,000 every year instead of the $100K she’s accustomed to. And third, disability insurance isn’t free. If we want to get ourselves a disability insurance policy, we should plan on paying up to 3% (and sometimes even more, depending on stuff like our age, gender, health, etc.) of our current income—so $3,000 in Marjorie’s case—for the policy’s premium.
