on your income?
The following sections point out why you should have disability insurance and help you determine the type of coverage you need to protect your income.
Why most people lack disability insurance and why you need it
Most folks lack long-term disability insurance. The two main reasons people don’t obtain this important type of insurance are as follows:
✓ Their company doesn’t offer it. Just three in ten workers are offered access to an LTD plan. Only 19 percent of those working for smaller employers – those employers with fewer than 100 employees – have access to an LTD plan. And just 6 percent of part-time workers have access to LTD insurance.
✓ They don’t enroll. Even among those in the minority who have access to LTD, many people don’t enroll. A common reason folks bypass coverage is that they believe their chances of disability are rare. Another perception is that only old people become disabled. Both of these perceptions are wrong.
✓ Life is uncertain. You can’t know when and what type of disability you may suffer. That’s because many disabilities are caused by medical problems (arthritis, cerebral palsy, diabetes, glaucoma, multiple sclerosis, muscular dystrophy, stroke, and so on) and accidents (head injuries, spinal injury, loss of limb, and so on). Although older folks are at greater risk for more severe medical problems, plenty of people in their 20s, 30s, and 40s suffer accidents or major medical problems leading to disability.
✓ Most applicants for Social Security disability benefits coverage are turned down. You can receive payments only if your disability will result in death or if you aren’t able to perform any substantial, gainful activity for more than a year.
✓ Even if you do qualify, your state’s disability plan and Social Security insurance programs won’t provide you with sufficient coverage. Many people are mistaken in thinking that their state’s disability plan and the Social Security disability insurance program will take care of them if they become disabled. Unfortunately, those programs don’t provide adequate coverage. State programs typically only pay benefits for one year or less, which isn’t going to cut it if you truly suffer a long-term disability that lasts for years. While one year of coverage is better than none, the premiums for such short-term coverage often are higher per dollar of benefit than through the best private insurer programs.
Similarly, although Social Security disability benefits can be paid long term, remember that these payments are only intended to provide for basic subsistence living expenses. Those earning more than $20,000 per year find that less than half of their income is replaced by Social Security disability payments. As Table 2-2 shows, the higher your income, the smaller the portion of your income will be replaced by Social Security disability.
✓ Worker’s compensation, if you have coverage through your employer, won’t pay benefits at all if you get injured or become sick away from your job. Such narrow coverage that only pays benefits under a limited set of circumstances isn’t the comprehensive insurance you need.
Table 2-2 The Portion of Your Income Being Replaced by Social Security Disability Benefits
Identifying needed disability coverage
Unless you’re already financially independent, you need long-term disability insurance during your working years. Generally speaking, you should have LTD coverage that provides a benefit of approximately 60 percent of your gross income. Because disability benefits payments are tax-free if you pay the premium, they should replace your current after-tax earnings.
✓ An “own occupation” definition of disability: This definition allows you to collect benefits if you can’t perform your regular occupation. For example, if you work as an accountant, your disability policy shouldn’t require you to take a job as a brick layer or retail worker if you no longer can perform the duties of an accountant.
✓ A noncancelable and guaranteed renewable clause: This clause guarantees that your policy can’t be canceled if you develop health problems. If you purchase a policy that requires periodic physical exams, you could lose your coverage when you’re most likely to need it.
✓
A financially appropriate benefit period: Obtain a policy that pays benefits until an age at which you would become financially self-sufficient. For most people, that would require obtaining a policy that pays benefits to age 65 or 67 (when Social Security retirement benefits begin).
If you’re close to being financially independent and expect to accomplish that or retire before your mid-60s, consider a policy that pays benefits for five years.
✓ A high deductible/waiting period: The waiting period is the “deductible” on disability insurance. It’s the time between your disability and when you can begin collecting benefits. We recommend that you take the longest waiting period that your financial circumstances allow, because doing so will greatly reduce your policy’s premiums. We generally recommend a waiting period of at least 90 or 180 days.
✓ Residual benefits: This feature pays you a partial benefit if you have a disability that prevents you from working full time.
✓ Cost-of-living adjustments: This provision automatically increases your benefit payment after you’re disabled by a set percentage or in step with inflation.
Shopping for disability coverage
After you understand the importance of having good disability insurance, hopefully you’ll be motivated to close the deal and buy it. Here are some ways to shop and compare so you end up with good coverage at a competitive price:
✓ Check with your employer. Group disability plans can greatly accelerate your shopping process and generally offer decent value. Unlike with life insurance plans, group disability plans tend to offer more bang for your buck.
✓ Peruse professional associations. For many self-employed people, if you find the associations that exist for your occupation or profession, you may well discover a fine disability plan. Just be sure to compare their offerings to whatever individual policy proposals you find.
✓ Avail yourself of agents. Get referrals to insurance agents in your area who specialize in disability insurance. Using the policy guidelines in the preceding section, “Identifying needed disability coverage,” solicit and evaluate proposals.
Most folks spend decades working. And getting caught up in the financial end of your career is easy and tempting. Of course, all other things being equal, you should earn more rather than less money! However, you should manage your career with an eye toward protecting and enhancing your earnings and your happiness.
We know folks who have been doing the same type of work for decades and love what they do. But they are the exception, not the norm.
A survey conducted by the Society for Human Resource Management found that when employees are younger (35 and under), their primary concerns are compensation and benefits. Older workers (over the age of 55) are more concerned with issues like job security, feeling safe at work, having the opportunity