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Understanding life and disability insurance

You've worked hard, and you want to protect your income and your family’s lifestyle. It's smart to evaluate your family's total insurance needs each year to make sure you have the right amount and type of insurance to cover unforeseen circumstances that can derail a financial plan. 

What is life insurance, and how does it work?

 Life insurance pays a sum of money to an insured person’s beneficiaries in the event of their death. 
 
If your family is growing, you might want to increase the amount of your life insurance to protect your loved ones. On the other hand, many people find as their net worth climbs and their children reach adulthood, they need less life insurance.  
 
If you choose to reduce your life insurance, you may want to apply the savings toward your health insurance, which becomes more critical as you age and continues to increase in cost. You might also look into long-term care insurance, which may offer a variety of features and options.  
 
Your annual review should also include a simple check of your insurance beneficiary designations to see whether they are correct. 

What is disability insurance, and how does it work?

Disability insurance pays the insured person a percentage of their normal income in the event of a major illness or injury that prevents them from working. 
 
The 2 primary types of disability insurance are short-term and long-term. Each offers distinct terms and coverage guidelines that are essential to understand before purchasing a policy. Though short- and long-term coverages are distinct, they’re also complementary programs, designed to cover different types of disability. 
 
  • Short-term disability insurance: A short-term policy is usually designed to replace 80% or more of your gross income for a short duration of time. For example, if recovery from surgery will keep you out of work for several weeks or months, short-term disability can replace the income you lose while you're out of work. You typically need to wait for an elimination period—5 or 10 days—before the coverage kicks in. Employers may offer short-term disability insurance to their employees, and many subsidize that coverage (some pay the full cost), though the subsidized portion may be taxable to the employee. 
  • Long-term disability insurance: What happens if your short-term disability coverage runs out and you're still out of work? In that case, you'd turn to long-term disability, which typically kicks in after you've been out of work for an extended time, such as 180 days. Long-term disability policies are quite different from their short-term peers, typically covering only about 60% of your salary. Fortunately, the coverage can last for years—even through the rest of your life, depending on the design of the policy. 

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This information is general in nature and provided for educational purposes only.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

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