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Disability Income: Is this the most important insurance that you never discuss?

June 19, 2017

As the month of May concludes, it also marks the close of Disability Awareness month. Yes, I am aware that 99.99% of you had no idea that May was a Disability Income Insurance Awareness month and that only insurance geeks like me did. However, disability income is an important topic that everyone should discuss and have a set plan but very few do. Far too often when I have asked my clients if they have disability income insurance they reply that they don’t know or they think that they have some at work. In my world, those answers aren’t acceptable. 

Often,  the reason for this indifference is simple - if I don’t have to think about it, then it won’t happen to me. While I understand the concept, I disagree with the effectiveness of the thought process.  With respect to disability income insurance, we MUST know what we have, how much we get and for how long regardless of whether privately owned or through your employer. Without this knowledge it will be impossible to know if you and your loved ones are adequately protected if you should ever become disabled for an extended period of time. I hope this article I will at least prompt you to question what benefits you have and are they adequate. 

While the vast majority of you have some form of disability income insurance, I would probably be safe to assume that you don’t know how long your policy pays, how much it pays, what is the definition of disability, does your benefit include an inflation rider, what happens if you go back to work, is your benefit integrated with your social security or other income, are your benefits taxable, etc. These are just some of the things that you need to know when looking at your disability income insurance. Most employer provided coverage does not provide you with comprehensive coverage and that is by design.  

Employer provided long-term disability policy will provide you with benefits up to 60% of your income, but often times up to a certain maximum (normally around $5,000 per month). Then many will decrease the benefit down the road like the FERS coverage for federal employees will be 60% for year 1 and then drop to 40% until they reach retirement eligibility. Most often the coverage will be integrated with any social security benefits which means that your benefit will be reduced to the extent of any income received from social security. If the benefit was paid for 100% by your employer or you took a tax deduction for the premium then your benefit will most likely be taxed. In your disability insurance, disability is defined as “own occupation” or “any occupation”? Is the definition of disability in our policy says “own occupation” or “any occupation”? While you may think that they are similar nothing can be further from the truth. Under “own occupation” definition you are considered disabled if you can’t do the material duties of YOUR occupation, whereas, under “any occupation” definition, you will only be considered disabled if you are unable to do any occupation that you are reasonably suited for by training, education and/or experience.

So the question you might be wondering is, is this a big deal? The simple answer is yes. Imagine for just a second that you make about $120,000 per year and all of sudden you fall down a flight of stairs and are disabled. So you were making roughly about $7,000 per month in net income and with a 60% disability clause you now only are eligible for $6,000 per month, but your policy has capped benefits at $5,000 per month. So now your income has gone from $7,000 per month on a net basis to about $4,000 per month while on disability ($5,000 per month gross with a 20% total tax reduces the income to $4,000). Can you and your loved ones afford for that to happen?

The determination if you need coverage or don’t is really simple. Can you afford to retire today? If you answer yes to that question then you can quit reading (I know I should have put this in the beginning, but I know that some of you who should have read it wouldn’t), but if you answer no, then you probably should start a comprehensive review of your disability income because finding out what coverage you have after you are disabled has the chance of ending badly.