Why income continuation planning matters

A disabling injury or illness can quickly turn a normal budget upside down. The Social Security Administration estimates that about one in four 20-year-olds will become disabled before reaching retirement age (Social Security Administration). That risk, combined with rising living costs, makes planning essential for anyone who relies on earned income—especially households with dependents, small-business owners, and those in physically demanding occupations.

This article explains the core building blocks of an income continuation plan, how to choose coverage, tax and cost implications, and a simple step-by-step checklist you can use to build or improve your plan.

Core components of an income continuation plan

  • Disability insurance
  • Short-term disability (STD): Replaces income for a limited period (typically weeks to 12 months). Useful for temporary injuries, surgeries, or illnesses that resolve relatively quickly.
  • Long-term disability (LTD): Replaces a portion of income for years or until retirement if you cannot return to work. LTD is the backbone of most long-term income-protection strategies.
  • Emergency savings: Liquid cash to cover the elimination (waiting) period before benefits begin and unexpected out-of-pocket expenses.
  • Employer benefits: Many employers offer group disability coverage. These plans can be cost-effective but often have limits; they should be reviewed alongside individual policies.
  • Government programs: Social Security Disability Insurance (SSDI) offers a federal safety net once eligibility requirements and the application process are met, but benefits can take months and may not fully replace private income (Social Security Administration).
  • Business protection: For business owners, consider key-person or overhead expense disability coverage and succession plans to keep the business solvent.

For more detail on how disability coverage fits within a broader protection strategy, see our guide: How Disability Insurance Fits into an Income Protection Plan.

How to evaluate and choose disability insurance

  1. Calculate your true monthly need
  • Start with essential living expenses (mortgage/rent, utilities, food, health care, debt payments, childcare). Subtract any income sources that would continue (spouse/partner income, rental or investment income).
  • Aim for policies that replace 60%–80% of your pre-tax income for LTD; STD policies usually replace a similar portion for the short term.
  1. Understand the definition of disability
  • Own-occupation vs. own-occupation-to-any-occupation vs. any-occupation: Own-occupation policies pay if you can’t perform your specific job; any-occupation requires you be unable to perform any job for which you’re reasonably suited.
  • For specialized professions (surgeons, pilots, top sales producers), an own-occupation definition is often crucial.
  1. Review waiting period (elimination period) and benefit period
  • The waiting period is how long you wait after becoming disabled before benefits start. Shorter waiting periods cost more but reduce reliance on savings.
  • The benefit period can be a fixed number of years or to age 65/67. Longer benefit periods cost more but provide greater security.
  1. Check policy riders and cost-of-living adjustments (COLA)
  • Common riders: residual/partial disability (pays if you can work part-time), future purchase option (increase coverage without new medical underwriting), and COLA (adjust benefits for inflation).
  1. Consider occupational class and medical underwriting
  • Premiums vary widely by occupation and health history. Smokers, high-risk jobs, and certain medical conditions can raise premiums or lead to exclusions.

If you’re self-employed, our article on Choosing Disability Insurance When You Are Self-Employed explains options for protecting business income and how to structure policies to match cash flow needs.

Taxation and cost considerations

  • Taxability of benefits depends on who pays the premium:
  • If you pay premiums with after-tax dollars, benefits are generally tax-free.
  • If your employer pays the premiums (and does not include their cost in your taxable income), the benefits you receive are generally taxable (IRS guidance). Consult an accountant for your specific situation.
  • Premiums are usually cheaper for group employer plans because of pooling, but group plans can lack portability when you change jobs.
  • Pricing varies by age, sex, health, occupation, benefit amount, and policy terms. Shop multiple insurers and compare identical benefit definitions.

Real-world examples that illustrate planning choices

  • Scenario A — Sarah, early 30s, small-business owner

  • Issue: Entire household income depends on Sarah’s business. She had no group plan. Recommended: A short-term policy to cover the elimination period and a long-term policy with an own-occupation definition. Outcome: When Sarah suffered a temporary disability, STD benefits replaced a portion of her income while she recovered, and LTD protected her long-term earnings ability.

  • Scenario B — John, 40, teacher with dependents

  • Issue: Stable job with some employer disability coverage, but the group policy replaced only 50% of income and ended after a short benefit period. Recommended: Top up employer coverage with individual LTD to reach a target replacement rate of 70% of pre-tax income. Outcome: Greater financial stability for his family if a long-term claim occurs.

These examples reflect planning decisions I’ve used in practice when advising clients: prioritize cash flow during the elimination period, then secure reliable income replacement for longer periods. In my 15 years advising clients, I’ve seen policies with clear own-occupation language prevent catastrophic career-ending income loss.

Common mistakes to avoid

  • Relying solely on employer coverage without portability. When you change jobs you may lose protection or face new medical underwriting.
  • Buying a policy that seems cheap but has a narrow definition of disability or material exclusions.
  • Underfunding your emergency savings, leaving you exposed during the elimination period.
  • Forgetting to coordinate public benefits (SSDI) and private policies — private carriers will ask about SSDI awards and offsets.

Practical action plan (a simple checklist)

  1. Build or top up 3–6 months of liquid emergency savings to cover short waits and medical expenses.
  2. Estimate your monthly income replacement need (essential expenses + buffer).
  3. Inventory existing benefits (employer STD/LTD, workers’ compensation, SSDI eligibility).
  4. Get illustrative quotes from at least three insurers using the same benefit definitions.
  5. Ask about own-occupation language and available riders (residual, COLA, future increase).
  6. Review tax consequences with a tax professional.
  7. Revisit your plan after major life changes (marriage, children, career change).

Where to get help

  • A licensed life or disability insurance agent can compare policies and explain underwriting.
  • A fee-only financial planner can integrate disability planning into your broader financial plan.
  • For information on federal disability benefits and eligibility, consult the Social Security Administration (ssa.gov) and the U.S. Department of Labor for workplace-related programs (dol.gov).

For deeper reading on long-term solutions, see our pages on Long-Term Disability Insurance: Protecting Your Income and Disability Insurance: Short-Term vs Long-Term Coverage.

Final thoughts and professional disclaimer

Income continuation planning reduces financial risk when the unexpected happens. Start with an honest assessment of expenses and realistic replacement targets, then combine savings, employer benefits, and well-defined individual policies to fill the gaps. In my practice, clients who pair a short waiting-period strategy with solid long-term coverage recover financially faster and experience less stress during recovery.

This article is for educational purposes only and does not constitute individualized financial, legal, or tax advice. Consult a licensed insurance agent, financial advisor, or tax professional to design a plan tailored to your situation.

Authoritative sources

  • Social Security Administration — Disability (ssa.gov)
  • U.S. Department of Labor — Disability and Work (dol.gov)
  • Internal Revenue Service — Taxation of Disability Benefits (irs.gov)