For many people, a long-term disability would be financially devastating. Although no one likes to think about this possibility, you should consider your options now so you can obtain disability income insurance if needed.
Even though it might be difficult, many individuals can find the funds to get through a short-term disability of six months or less.
Find out what benefits you would be entitled to under sick leave policies, short-term disability policies provided by your employer, and workers’ compensation. Another source of funds might be your emergency fund of three to six months of living expenses.
When considering a long-term disability, assess your income needs until age 65, when presumably retirement benefits would begin. During this analysis, consider the following items:
Estimate your monthly expenses following a disability. Typically, some of your disability benefits would be free of income taxes (if you paid the premiums rather than your employer) and you won’t incur work-related expenses.
However, don’t underestimate your expenses, since your medical and rehabilitation expenses might be much higher after a disability. Find out if you would continue to be covered under your employer’s health insurance plan. If not, you’ll need to make provisions for that expense.
Review your annual Social Security statement for an estimate of disability benefits.
However, keep in mind that eligibility requirements are quite stringent — you must be totally disabled, have little or no chance of recovery, and wait six months or longer for your first check. Even if you do qualify, benefits tend to be modest.
Decide what personal resources you would use. You can access funds from individual retirement accounts, annuities, or 401(k) plans without penalty if you are disabled.
But first consider whether you want to risk depleting your retirement fund or children’s college fund due to a long-term disability.
Investigate any long-term disability benefits provided by your employer. Long-term group disability plans are typically less common than short-term plans. The policies frequently have strict definitions of disability, pay up to 60% of your base salary (bonuses and commissions generally aren’t included), pay two to five years of benefits, and don’t provide cost-of-living increases.
Also factor in income taxes that must be paid on any benefits paid for by your employer. Check’ to see if your employer-sponsored retirement plan offers an option for early retirement in case of disability.
Consider purchasing disability income insurance to fill any gaps. However, you might not be able to replace more than 60% to 80% of your income through insurance, since insurers want you to have an incentive to return to work.
Any benefits from policies you paid for are received income- tax free. Coordinate insurance from your employer and your own policy so the maximum benefits do not exceed the amount the insurance companies will pay. Otherwise, you may pay for coverage you won’t receive.
If you decide to purchase disability income insurance, make sure to consider these things:
Pay special attention to the definition of disability. There are three basic types of coverage: own occupation, any occupation, and income replacement. Own occupation pays benefits when you can’t work at your specific occupation. Many professionals, such as doctors and lawyers, opt for this coverage.
However, due to substantial claims, this coverage is now more difficult to obtain. You may be able to find own-occupation coverage for a specified period, with the policy then converting to any- occupation coverage. Any occupation means you must be unable to work at any occupation that you would be suited for based on your training and education.
Income-replacement policies pay the difference between what you were earning before the disability and what you are earning now. For most individuals, income-replacement policies will provide the best balance between cost and benefits.
Opt for a long waiting period before benefits start. This is a good way to reduce premiums, provided you have other resources to rely on for the short term, such as sick leave, personal savings and investments, and short-term disability coverage. Waiting periods can range from one week to two years, but the most common option is a 90-day delay in benefits.
Consider coverage that pays benefits until age 65. Disability insurance is designed to protect your financial situation from a serious disability, so you should obtain coverage for the long term.
Policies for lifetime benefits are rare and expensive. It’s probably not needed, however, since you will probably be eligible for Social Security and other retirement benefits once you turn 65.
Look for a policy that provides residual benefits. This allows you to return to work on a part-time basis and still receive partial benefits.
Make sure the policy is either non-cancelable or guaranteed renewable. Non-cancelable means you can renew the policy every year at the same premium. Guaranteed renewable means you can renew the policy every year, but the premium can increase as long as it is not done in a discriminatory manner. Either provision will ensure that the policy can’t be canceled due to medical problems.
Please call if you’d like to discuss your need for disability income insurance in more detail.