According to the Social Security Administration, three in 10 workers entering the work force today will become disabled before retiring1. If you’re like many individuals today, you probably already have a lot of protection in place – such as, life insurance, which provides your heirs with a death benefit, and medical insurance, which helps to pay your doctor and hospital bills. But what part of your “safety net” protects you against the financial consequences of being out of work? The answer: disability income (DI) insurance.
Group DI and Social Security
Some companies feel that disability is such a threat to their employees’ financial security that they include DI coverage in their group benefits. Typically, this coverage might replace 50% to 60% of an employee’s income. But be honest: Could you afford to live off of 50% to 60% of your current paycheck for several months without depleting your savings or borrowing? If not, perhaps you should discuss with a financial professional the idea of purchasing individual DI coverage.
Social Security provides a modest benefit to disabled workers, but getting approval for coverage isn’t easy. According to the Council for Disability Awareness, less than half – 36% – of those workers who applied for SSDI benefits in 2010 were approved2. In addition, you can’t collect Social Security disability benefits until the end of your fifth full month of disability – and only then if you are expected to be out of work for 12 months or longer. Personal DI coverage can help to tide you over financially should you become disabled for a long period of time.
Provisions of DI Coverage3
Because several leading insurance companies offer individual DI coverage in the U.S., it can pay to evaluate their policies carefully. But it’s not just about price. Here are some of the most important policy provisions you should compare:
- Monthly Benefit – The amount that the insurance company will pay you each month after you become disabled and have satisfied a waiting period. On personal DI coverage, companies typically will pay monthly benefits as high as about 50% to 70% of your current salary.
- Waiting Period – The number of days you must be disabled before your monthly benefit can begin. The average waiting period is 90 days or less.
- Benefit Period – The longest period of time a company may pay benefits for a continuous disability from the same cause.
- Renewability – This determines the policyholder’s rights to continue the policy virtually unchanged, compared to the company’s right to reduce the benefit amount, increase premiums, or make other contractual changes. The best policies promise that as long as premiums are paid, the policy can’t be substantially changed, and premiums won’t be increased.
- Partial Disability Benefit – This determines whether the policyholder is entitled to some income protection in the event of partial disability.
- Waiver of Premium – This benefit, offered by some companies, eliminates the need to pay disability insurance premiums while a disability continues. With some policies, this benefit must be purchased as a rider for an additional charge.
- Rehabilitation Benefit – This feature reimburses specific costs incurred in an agreed-upon program of rehabilitation during a period of disability.
- Cost of Living Adjustment Rider – This benefit, often purchased at additional cost in the form of a rider, provides for an annual increase in disability insurance coverage to keep pace with changes in the Consumer Price Index, or some other benchmark of inflation, while the insured is disabled.
- True Own Occupation Coverage – A premier level of coverage, when your DI policy includes this type of coverage, you will be eligible for disability insurance benefits if you are totally disabled due to injury or sickness and are not able to work in your own occupation, even if you are able to work in another occupation.
Benefit Limits; Benefit Taxability
Most insurance companies will not write personal DI coverage that pays more than about 60% to 70% of your current salary (including any group disability benefits you receive from work or other policies). Keep in mind that while group disability insurance coverage generally pays benefits that are taxable to the recipient, individual disability insurance coverage ordinarily pays benefits that are not taxed4. So if you have group disability insurance coverage through your employer, it’s important to make sure you are replacing enough after-tax income to get through a disability.
In summary, disability insurance is an integral part of a comprehensive financial safety net, especially for people who are in their peak earning years and who cannot afford the financial impact of a serious disability. Most disability insurance is offered through financial professionals, whose help can be of great value in comparing choices, costs, and features.
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1 Disability Planner: Social Security Protection if you become Disabled. Social Security Administration, April 2012. http://www.ssa.gov/dibplan/
2 The 2011 Council for Disability Awareness Long-Term Disability Claims Review, http://www.disabilitycanhappen.org/research/CDA_LTD_Claims_Survey_2011.asp
3 These are just a few provisions available in the marketplace today. These descriptions of policy provisions are intended as a summary. Be sure to discuss the provisions of any policy you are considering purchasing with your insurance broker or agent.
4 Benefits are paid tax-free when the premiums are paid with after-tax dollars.
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Prepared by The Guardian Life Insurance Company of America. The information contained in this article is for general, informational purposes only. This publication is for the purpose of education and information only and is not intended to constitute tax or legal advice. For information on your specific situation, please consult your personal legal or tax advisor.