It’s interesting to look at what Americans consider most important in their lives. You can get an idea of our priorities when you consider what we insure and what we don’t insure. For example, most people will insure their car, their boat, their RV, and their home without giving it a second thought. It’s obvious that protecting assets is always a priority. We also know that buying health insurance at work or individually is a given, and even six out of ten will manage to get some type of life insurance because we know we have to have it, but what about our ability to earn, what about Disability Insurance?
Social Security surveys have revealed that one in four of 20-year-old workers will become disabled before they turn 67. When you consider losing your ability to earn a living for many years, it is certainly more concerning than the loss of a vehicle or even a home. Simple math tells us that losing a $45,000 a year salary for 20 years hurts a lot more than a $200,000 house burning down, and yet only about 30 percent of workers have coverage to replace their income.
Fortunately, U.S. workers do have a safety net. Since they are paying into the Social Security program, they can receive monthly benefits once they qualify. Unfortunately, however, the system is overburdened and dysfunctional. It can take a year or longer to get approved, and once you are approved, the average payment is about $1,130 per month. Since many U.S. workers have less than $500 in savings, financial devastation is likely to set in before the first payment is received.
Disability Insurance Options
- Group Disability – Most employers that offer health benefits also offer a group disability plan. Although the lowest tier of group coverage is very affordable, benefits vary greatly from plan to plan. Most group plans limit the monthly benefit to about 60% or your average earnings, and some contain a cap on benefits. Always review the plan you’re being offered to make certain it meets your needs, and if not, you’ll be better off buying and individual plan that will meet your needs.
- Individual Disability Plans – If your employer does not offer a group disability plan, or the one they do offer is inadequate, you should shop for an individual plan. Please understand that buying an individual plan means you pay more because of your age or occupation, but you can purchase through an experienced and reputable agent who can help you navigate the confusing disability insurance landscape. Buying an insurance product that does not meet your needs means that when the worse thing happens, you’ll be very disappointed in the coverage you spent hard-earned money to purchase.
- Supplemental Disability Plan – For employees that have an employer-sponsored basic disability plan or feel content relying on Social Security disability benefits, supplemental disability may be a solution. Typically, supplemental disability policies will add an additional benefit of about 20 percent of your average income for a modest premium.
Even though no type of coverage will replace 100 percent of your income, the benefits are non-taxable (only if you pay the premium rather than your employer), and you will probably avoid bankruptcy or borrowing money from friends and family.
Options You Should be Aware Of
- Non-Cancellable Policy – Most Disability Income (DI) insurers offer policies that cannot be canceled by the company and will renew automatically as long as you pay the periodic premium required by the company. Additionally, the premiums will not change over the life of the policy. You should, however, make certain this clause appears in the policy.
- Elimination/Waiting Period – Your elimination or waiting period is the amount of time you will have to wait before your benefit payments would begin. The longer your waiting period is, the lower your premium will be. It’s important that your waiting period is based on the amount of money you have set aside to take care of normal living expenses. For example, if you live paycheck to paycheck, you should elect whichever shorter waiting period that you can afford.
- Own Occupation versus Any Occupation – This clause in your policy is very important. Own occupation refers to the ability to perform the job you have, whereas any occupation refers to any occupation you can physically perform no matter what you might earn. For example, if you are a surgeon that becomes disabled, you want to make sure that disability is based on your ability as a surgeon, and not based on the ability of someone who teaches at a medical facility.
- Business Overhead Expense – As a business owner, you will need a policy that pays not only replacement income benefits but also additional benefits that will help to cover the overhead expenses at your business. When you own a business and draw a paycheck, you will certainly need additional protection to cover expenses like rental expenses, utilities, and other expenses that your company is responsible for.
- Cost of Living Adjustments (COLA) – Many DI policies offer a cost of living adjustment after they begin paying out benefits. This helps cover the cost of living increases that you will have to deal with if your disability lasts several years or more.
- Retirement – You may not be able to continue making contributions to your 401k or IRA or other retirement plans while disabled. Most disability policies offer a retirement protection rider (for an additional cost) or separate policy which will continue to deposit funds into a retirement plan so your retirement will be sufficiently funded by the time you reach retirement age.
- Lifetime Benefit – This option can be selected (with some companies) so that in the event you become totally disabled, you will receive benefits for a lifetime rather than stopping at age 65. The additional premium you pay will be based on your age when you purchase your coverage.