Protecting Your Ability to Earn A Living
Anyone who is working and has financial obligations should consider disability insurance.
Consider: If you make $75,000 of annual gross household income, you generate $2.1 million in twenty years — assuming 3% inflation. In other words, you’re a machine that generates over $2M a year. If your machine needs a tune up and lands in the fix-it shop for awhile, what to do?
Did you know 1:
- 1 in 3 working Americans will become disabled for 90 days or more before reaching age 65?
- The average disability claim lasts for almost 32 months?
- 1 in 8 workers will become disabled for 5 years or more during his or her lifetime.
- Roughly 12% of the American population is classified as disabled
- 90% of all disabilities are caused by illness, not accidents
- Medical issues contributed to 62% of personal bankruptcies
Despite these statistics, 64% of Americans believe their chances of becoming disabled are much lower than the actual odds.
Disability Insurance is a warranty on the machine. It provides clients with payment of a portion of their income while out of work– due to a disability — to continue paying bills like car, mortgage, school debt and/or utility payments, for example.
Aside from several State programs that may be available on a limited basis, individuals generally have 4 access points through which to secure continuation of income payments during a period of disability:
- Social Security Disability (SSDI) through the federal government;
- Workers’ Compensation insurance required of employers by States;
- Short-term and Long-term disability insurance programs sponsored by employers; or
- Individual Disability Insurance Policies
Federal Social Security Disability (SSDI). For all intents and purposes, the federal government’s Social Security Disability benefits are extremely difficult to qualify for, do not begin until 6 months after the onset of the disability, require complete and total disability to qualify, and are significantly limited in payout.
Worker’s Compensation. Workers’ compensation benefits are provided to employees when they are injured at work, (for example, carpal tunnel syndrome in office workers), as an alternative to litigation. As required by most state laws, employers are required to carry workers’ compensation to cover employees who become injured on the job.
Employer-Sponsored Disability Insurance. Employers may offer some minimum level of disability insurance for short term and long-term disabilities, and may pay a portion, or the full cost, of one or both for the employee. The Short-Term Disability portion is generally available for a limited percentage of pay and for a maximum duration of 3-6 months of coverage. Long-term disability insurance offered by an employer can often require employees to chip in premiums. Long-term disability coverage takes over where the short-term coverage ends, typically starting after 6 months of short term coverage, and typically ends after a total of two years of disability, between short term and long- term coverage. There is typically a waiting period before short term portion kicks in, typically covered by the employee’s available sick time. Many employers require employees to be employed for a period of time, usually 6 months to a year, before becoming eligible for the employer-sponsored short term disability. Employees may have the option, for a cost, to extend benefits offered by the employer.
Individually Owned Disability Insurance. Individuals can purchase disability insurance to complement benefits provided through SSDI or an employer-sponsored plan. A qualified disability is based on the individual contract’s definition of “total” disability. That is, there are generally two definitions of disability:
- Own Occupation
- Any Occupation
Contracts that define a total disability in terms of one’s “own” occupation refer to an individual’s inability to perform the duties of his “own” occupation. An insured is considered disabled under the “own” occupation contract if she cannot perform duties for which she is trained, qualified, skilled or experienced. Consider a physician, for instance, who is a surgeon and who cannot perform her “own occupation,” such as surgery, due to an injury.
On the other hand, contracts that define disability as the inability for the insured to perform duties of “any occupation” are much more restrictive. That is, if the doctor can consult on surgical procedures, as opposed to performing surgeries, then the doctor would not qualify as being disabled for purposes of payment under the “any occupation” contract. Note that physicians are very aware of their need for disability insurance and contracts for physicians are highly customized for them.
4 Things to Consider When Buying Disability Insurance
- Waiting Period. This is equivalent to a deductible on car or home-owners insurance. The longer you wait before receiving the disability benefit payments, the less costly your premiums will be.
- Indexing. The cost of living (COLA) can eat into your benefit payments if you end up having a disability that lasts for several years, or you don’t exercise benefits until many years down the road. Consider a policy that adjusts benefit payments to reflect an increase in the cost of living.
- Riders. In addition to an indexing rider mentioned above, if a client has a business it is possible to add a rider to cover expenses connected to business overhead expenses. Some policies can also include a rider to pay accidental death, dismemberment and loss of sight benefits. A social security rider may also be added to pay an additional amount if the policyholder is turned down for SSDI benefits. Finally, a ROP, or Return of Premium rider refunds all or a portion of the premiums if the claims experience over a period of time is favorable.
- Taxation. Because the premiums for individual policies are paid by the insured out of pocket, the income benefits, when received, are tax free. However, any benefits received from coverage paid for by the employer or SSDI will be taxable to the employee when received. It will be important to consider how much the benefit is, net of taxes.
Help your clients protect their ability to earn a living. Speak to them about the peace of mind Disability Insurance offers.