The difference between an ESA and disability insurance

As financial planning becomes an increasingly important aspect of employee benefits and overall well-being, it's crucial to understand the various tools available to help secure your financial future. Two key components of financial planning are emergency savings accounts and disability insurance. While they each serve important functions, they aren’t interchangeable—and it's important to understand the difference between the two to make sure you have all your bases covered.

An emergency savings account is a designated account used to save funds for unexpected events, such as job loss, medical expenses, or natural disasters. In comparison, disability insurance provides financial support in the event of a long-term injury or illness that prevents the policyholder from being able to work.

In this article, we'll delve into the specifics of these two financial tools and explain why it's important to understand the difference between an emergency savings account and disability insurance and make informed choices regarding your financial safeguards.

What is an emergency savings account?

An emergency savings account is a type of savings account specifically designated for unexpected expenses or emergencies. The purpose of this account is to provide a financial cushion in case of an emergency, like a job loss, medical bill, or home repair. The idea is to have enough money set aside in this account to cover essential expenses for several months without relying on credit cards or loans.

Emergency savings accounts are usually separate from other savings or checking accounts, and the funds in them should only be used in the case of an emergency. It is recommended that individuals aim to have at least three to six months' worth of living expenses saved in an emergency fund, but we advise aiming for eight months’ worth of savings.

Having an emergency savings account can provide peace of mind and help individuals avoid going into debt during a financial crisis. Additionally, placing your emergency savings into a high yield savings account may offer higher interest rates than traditional savings accounts, which helps the money in the account to grow over time and increase your savings.

It’s important to regularly deposit money into a dedicated emergency savings account and to resist the temptation to use the funds for non-emergency expenses. Building an emergency fund takes time, but it’s a crucial step towards financial wellness and stability.

What is disability insurance?

Disability insurance is a type of insurance that provides financial protection in the event that you’re unable to work due to a disabling injury or illness. Disability insurance replaces a portion of your income if you can’t work due to a disability, helping to cover the costs of living and other expenses during the disability.

Disability insurance typically comes in two forms: 

• Short-term disability insurance, which provides benefits for a limited period of time (usually up to several months)
• Long-term disability insurance, which provides benefits for a longer period of time (often until retirement age)

In general, disability insurance provides a safety net for individuals who may not have other sources of income if they become unable to work. This can include salaried employees, self-employed individuals, and business owners.

Disability insurance policies typically have eligibility requirements, such as a minimum length of time working for an employer, and may also have restrictions on the types of disabilities that are covered. The amount of benefits an individual receives from disability insurance will depend on the specifics of their policy, but it generally ranges from 40-70% of their income.

It’s important to consider disability insurance as part of a comprehensive financial plan, particularly because the likelihood of becoming disabled at some point in one's lifetime is higher than many people realize. Having disability insurance can also help you maintain financial wellness in the event of a disabling injury or illness.

What is short-term disability vs. long-term disability insurance?

Short-term disability and long-term disability are two types of disability insurance that provide financial protection in the event of a disabling injury or illness.

Short-term disability insurance provides benefits for a limited period of time, usually up to several months. This type of disability insurance is typically designed to provide temporary financial support for individuals who are unable to work because of a short-term illness or injury and expect to return to work again within a few months.

Long-term disability insurance, on the other hand, provides benefits for a longer period of time, often until retirement age. This type of disability insurance is designed to provide ongoing financial support for people who are unable to work due to a long-term illness or injury and expect to be unable to work for an extended period of time.

The type of disability insurance an individual needs will depend on their personal circumstances and the likelihood of a disabling injury or illness. For example, if an individual works in a physically demanding job or has a pre-existing medical condition, they may be more likely to need long-term disability insurance. On the other hand, if an individual is generally healthy and has a lower risk of becoming disabled, they may be able to get by with just short-term disability insurance.

It’s important to carefully consider your options and consult with a financial advisor or insurance professional to determine which type of disability insurance is best for your needs.

Key differences between an emergency savings account and disability insurance

While both an emergency savings account and disability insurance serve important financial protection functions, they’re each designed to address different types of financial risks and have different eligibility requirements and coverage levels. It’s critical to consider both as part of a comprehensive financial plan. The key differences between an emergency savings account and disability insurance are:

• Purpose and function: The purpose of an emergency savings account is to provide a financial cushion in case of an unexpected expense or emergency, while the purpose of disability insurance is to provide financial protection in the event that an individual is unable to work due to a disabling injury or illness.
• Types of expenses covered: An emergency savings account is used to cover a variety of unexpected expenses or emergencies, such as a job loss, medical bill, or home repair. Disability insurance, on the other hand, is specifically designed to replace a portion of an individual's income if they are unable to work due to a disability, injury, or illness.
• Availability: An emergency savings account is available to anyone who wants to set one up and deposit money into it. Disability insurance, however, is typically offered through an employer and may have eligibility requirements, such as a minimum length of time working for the employer. Some individuals may also choose to purchase private disability insurance.

Combining an ESA and disability insurance for comprehensive coverage

It’s important to consider both emergency savings accounts (ESAs) and disability insurance as part of a comprehensive financial plan to protect against unexpected expenses and lost income in several ways:

• Diversify your financial protection: ESAs and disability insurance serve different functions, but both are important in providing financial protection against different types of financial risks. Having both forms of protection helps to diversify and strengthen a financial plan, providing a safety net in the event of unexpected expenses or loss of income.
• Avoid debt: By having both an ESA and disability insurance in place, you can avoid going into debt during a financial crisis, such as a job loss or disability. This can help to reduce stress and improve financial stability in the long term.
• Supplement other forms of protection: ESAs and disability insurance can also complement other forms of financial protection like health insurance, life insurance, and retirement savings, to provide a comprehensive financial safety net.

At SecureSave, we understand that life can be unpredictable and emergencies happen, which is why we offer employer-sponsored emergency savings accounts to help you prepare for the unexpected. If your employer doesn’t currently offer ESAs, ask them to consider SecureSave’s solution.