What would happen if you were unable to work for an extended period of time?
The chance of missing months or years of work due to an injury or illness may seem remote, but it could happen. The Social Security Administration estimates that one in four of today’s 20-year-olds will become disabled for 90 days or more before they reach the retirement age of 67. And, nearly 70 percent of all non-government employees have no disability insurance in place. It’s a sobering thought but there are steps you can take to protect yourself.
In this article, we’ll explore the ins and outs of disability insurance and share some valuable information that everyone needs to know.
- Start with the basics. Disability insurance covers a portion of your income if an illness or injury prevents you from working. It includes everything from freak accidents to serious ailments like cancer. Many companies offer disability insurance and pay for some or all of the premiums, or they may offer it as a voluntary benefit that employees can opt into at the group rate. Alternatively, you can buy a policy on your own. The younger and healthier you are, the easier it is to qualify and the lower the premiums will be. There are two primary types of disability insurance:
- Short term disability (STD) insurance: Generally provides 60 - 70% of your base salary for three months to one year, depending upon the terms of the policy.
- Long term disability (LTD) insurance: Typically provides 40 - 60% of your base salary but can be increased to as much as 70% for five years or longer if your disability continues.
While STD policies are available for a nominal cost, they’re not as necessary as LTD policies if you have emergency funds that can be used to cover those interim expenses.
- In employer-sponsored group disability policies, the taxability of benefits is determined by who pays the premium. If you pay the total premium using after-tax income, then your benefits will be tax-free. On the other hand, if your employer pays the total premium, then your benefits will be taxable. Most companies offer the option for employees to choose their disability benefit disposition. Choosing it as an after-tax benefit will allow you to avoid these onerous taxes.
- Disability insurance policies have two main definitions of “disabled”. Some policies pay out only if you are unable to work any job for which you’re qualified. This is known as “any occupation”. Others pay out if you can’t perform a job in your occupation, which is known as “own occupation”. The broader the definition of disability, the higher the premium will be. Often, a policy through you employer has “own occupation” for a limited time and then “any occupation”. It is important to read the details to learn the coverage.
- Your group policy may not provide adequate coverage. In many cases, group polices only offer benefits up to 50% of your salary. For a nominal out-of-pocket cost, you can increase the difference to obtain the maximum benefit amount, which is a wise move. For executives and other high-paying positions, the group policy’s monthly maximum benefit payment may still fall short for your needs. In this case, it’s wise to supplement that coverage on your own if your salary far exceeds the cap.
- Most LTD insurance policies terminate at age 65. If you have a policy in place and continue working beyond the age of 65, you likely won’t be covered.
- You can control the cost of an individual policy by adjusting certain variables. While you can’t change your age (you pay more as you get older) or gender (women have more claims and live longer, so their policies cost more), you can still affect your premium’s price tag. For example, you can reduce the premium by increasing the waiting period before benefits kick in, known as the elimination period. Similarly, you can adjust the length of benefits received. The longer the period that the policy promises to pay out if you become disabled, the more you’ll pay in premiums.
- Don’t rely on obtaining Social Security Disability (SSDI) benefits. Social Security pays disability benefits, but it’s far more difficult and time-consuming to qualify, and the payments are low. The average monthly SSDI benefit in 2019 was just $1,237.
Your ability to earn an income is one of your most valuable assets, so it’s smart to protect it. If you have questions or need further guidance regarding disability insurance, our knowledgeable team of advisors is here to help. Please contact us to learn more.
About FAI Wealth Management, Inc.: Located in Columbia, Maryland, FAI focuses on helping clients create the financial future they desire by protecting their wealth, making the most of their assets, and planning for life's uncertainties. The firm combines fee-only, fiduciary-driven guidance with highly personalized, consultative financial planning and investment services that enable individuals, families, and businesses to navigate complex life transitions. Founded in 1987, FAI currently manages more than $350 million in client assets nationwide. For more information about FAI Wealth Management, please visit the website at https://www.faiwealth.com or call 410.715.9200.