Protecting Your Income From Disability
Disability Income Insurance
WHAT HAPPENS TO YOUR FAMILY IF ANYTHING SHOULD HAPPEN TO YOU?
Most people answer this question by purchasing lifeinsurance, but the premature passing of a breadwinner isn’t the only tragedy that can affect a family financially. The risk of disability through illness or an accident is greater than the risk of premature death. The financial consequences may be equally or perhaps even more dire, depending on the nature of the disability, the expenses incurred as a result of it and whether you’re eventually able to go back to work.
Should You Own Your Own Disability Income Insurance Policy?
That depends. If you’re self-employed or not covered by disability insurance at work, certainly. Even if you are covered at work, it is important for you to understand the specifics of that coverage and how you might be affected under certain scenarios. For example:
- A short-term group disability income insurance plan replaces a portion of your income for a relatively brief period of time (3-12 months is fairly common).
- A long-term group income insurance disability plan will kick in when your group short-term plan coverage ends. The question is whether it will replace all the income you were earning or only a portion of it.
- Some group plans only pay benefits if you are unable to perform the duties of your current occupation, while others pay if you are unable to perform the duties of any occupation based on your education, training and experience.
- Highly compensated executives often find that their employer’s group disability income insurance plan does not cover bonuses, stock options or other compensation beyond a portion of their salary.
Clearly, it pays to consult with your plan administrator to determine exactly what your group long-term disability income insurance coverage does or does not provide. Armed with this knowledge, you can work with your Lenox advisor to compare coverages and select the combination of features that you believe will protect you and your family adequately.
Factors to Consider When Shopping For A Policy
- Long-term or short-term?
Ideally, you want both, but if you have to make a choice, long-term is more critical. Short-term policies pay benefits for several months, while long-term policies can pay benefits to age 70. You may be able to fund living expenses over the short-term from savings, but can you really afford to go years without a paycheck?
- Amount of coverage
When you buy your own individual disability income insurance policy, any benefits you receive are income tax-free. This is not always the case with employer group long-term disability insurance plans. As a result, with your individual policy you do not have to cover 100% of your gross income. Depending on your tax bracket, 60-80% may suffice.
- Definition of disability
As discussed, some policies pay benefits if you are unable to work at any occupation. Other policies have a stricter definition – they will only pay if you cannot work at your own occupation.
- Benefit period
How long will your policy continue to provide you with payments? Short-term policies typically pay from 3-12 months. Individual long-term policies can pay benefits to age 65 or longer. You might want to think about covering yourself until you’re eligible for Social Security and/ or any pension payments to which you are entitled.
- Elimination period
Policies don’t begin making payments the moment you become disabled. There is usually a waiting period before benefits begin. The longer the waiting period, the less the policy will cost. You and your Financial Advisor will have to determine what you can realistically afford and how long you can maintain your lifestyle through savings before you require benefits.
Other considerations include:
- Whether you want your benefits to keep pace with inflation.
- Whether you want an insurability option to purchase more benefits in the future without medical underwriting.
- Whether the insurance company can increase your premiums over time.
- Whether the policy stipulates conditions under which your payments will cease.
As you would expect, how much you actually pay for your policy is a function of all these factors. Your Financial Advisor will help you assess your priorities and develop a strategy to achieve a balance between affordable pricing and adequate benefits.
Why Disability Income Insurance Is Crucial
- The average Social Security Disability Income Benefit as of January 2022 was only $841 for an individual and $1,261 for a couple per month.
- More than 1 in 4 of today’s 20-year-olds can expect to be out of work for at least a year because of a disability condition before they reach retirement age.
- Workers Compensation only covers disabling illness or injury if it was directly work-related.
Source: Council for Disability Awareness, September 2021 | sa.gov annual statistical supplement 2022