A worker has a 30% chance of being disabled for at least three months during his/her career. The average long-term disability is 2.5 years. If you became disabled, could you continue to pay the family bills?
According to the Social Security Administration, 30% of workers entering the workforce today will become disabled for a period of three months or longer during their career. Moreover, the Council for Disability Awareness states that the average long-term disability absence from work is 2.5 years. Could you or your family make ends meet if you lost your current income? Most Americans cannot.
How to Protect Your Earnings
In order to protect your income in the event of disability, you can obtain disability insurance. Many employers offer group disability coverage. If your employer does not, or if you are self-employed, you can purchase a personally owned policy.
Short-term disability policies provide income if you are unable to work due to injury, illness or childbirth. Unless this coverage is provided by your employer, the least expensive way to pay for short-term disability is to establish an emergency fund with three to six months of living expenses. This type of account should be liquid and easily accessible.
Long-term disability policies are intended to provide benefits if you are unable to earn income for an extended period of time. These policies have an elimination period, which is the amount of time you must wait from the date of disability until you are eligible for benefits. A policy with a 30-day elimination period will have a significantly higher premium than a policy with a 120-day elimination period. If you have short-term disability, the elimination period of your long-term disability policy should coordinate with your short-term coverage.
If you are thinking that Social Security Disability Insurance (SSDI) will meet your living expenses, think again. According to the Social Security Administration, an average of 63% of initial SSDI application claims were denied during the period of 2007-2016. For those that were eligible for benefits, the average monthly benefit was $1,472 for men and $1,168 for women (2017 dollars).
Key Provisions in a Policy
- Coverage Amount. It is important to understand how much of your income will be replaced in the event of disability. Typically, you have the ability to replace 60% to 70% of your income through a long-term disability policy. However, many policies cap the monthly benefit amount. For example, a policy may pay 60% of your income up to a monthly maximum of $6,000. You should also have a clear understanding of what constitutes income: is it salary only or does it include bonus and commissions?
- Taxable or Tax-Free Benefits. When determining the benefit amount, you should know if the benefits received will be taxable to you. If your employer pays the premium or if you pay the premiums with pre-tax dollars, any benefits received will be taxable. However, if you pay policy premiums with after-tax dollars, the benefits received are tax-free.
- Definition of Disability. It is important to understand the definition of disability in the policy. An “own-occupation” policy is more desirable than an “any-occupation” policy. When you have an “own-occ” policy, benefits will be paid if you cannot perform the duties of your specific job. An “any-occ” policy will only pay if you cannot perform duties of any job. For example, assume you are a right-handed dentist and your right hand becomes permanently disabled. An “own-occ” policy will provide you full benefits even if you are capable of other employment, such as teaching at the dental school. Given the same circumstances, an “any-occ” policy would pay no benefits.
- Benefit Period. Policies will also include a benefit period. Some will only pay for a stated number of years. It is preferable to consider a policy that will pay until you have reached full-retirement age. At that time, you will be eligible for social security retirement benefits.
- Guaranteed and Non-cancelable Provisions. You should also look for policies that are guaranteed renewable and non-cancelable. If the policy is guaranteed renewable, the insurance company cannot cancel your coverage as long as you are paying the policy premiums. Non-cancelable means that the insurance company cannot raise the premium on the policy.
- Policy Portability. Group disability policies are usually less expensive than personally owned coverage. However, they are not portable. For this reason, you may prefer to purchase a personal policy instead of relying solely on group coverage, since not all employers offer this benefit.
Riders to Consider
You can purchase riders for your policy in order to customize a policy to meet your needs. A “cost of living adjustment” rider (COLA) will help protect your monthly benefit amount from the affects of inflation. Once you have received benefits for a year, the benefit amount will automatically increase based on the terms stated in your policy.
The “future increase option” rider can be very beneficial to younger employees as it allows you to purchase additional coverage at specified dates. Therefore, you can purchase more coverage as your income increases without providing evidence of insurability.
“Social insurance offset benefit” pays you a set monthly amount in the event that Social Security Disability Insurance denies your claim which, more than likely, they will. Even if SSDI approves your claim, you might need to wait up to twelve months to receive your benefit. This rider will pay until your SSDI payment begins.
Disability insurance is a key component of your contingency planning. In addition to the points discussed, you should always review the strength of the insurance provider to ensure the policy will pay off in your time of need.
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