Insurance isn’t glamorous, but it is a necessity for most people. We’ve discussed life and health insurance already. Let’s move on disability insurance. TMA Insurance Trust shares some startling statistics:
- One in 8 workers will become disabled for five years or more during their lifetime.
- One in 3 working Americans will become disabled for 90 days or more before age 65.
- The average group long-term disability claim lasts nearly 3 years (34.6 months to be precise).
- 90% of disabilities are caused by illness, not accidents.
If you underestimate your risk of disability, you’re not alone … only 10% of individuals accurately estimate their chance of disability.
Short-term (“ST”) disabilities policies cover 6 months of disability or less. It’s typically better to build up cash reserves rather than paying a premium on a short-term disability policy. Long-term (“LT”) disability insurance is critical because it would be much more difficult to build enough cash reserve for a disability that lasts multiple years.
Premiums on individual LT disability policies are usually higher for women than men, especially ones in their “childbearing” years since the likelihood of disability is greater. Life insurance is the opposite: men’s life insurance premiums are typically more expensive than women’s premiums to account for a shorter male life expectancy.
Definitions of Disability
The definition of disability matters if you want full disability benefits. Any and own-occupation definitions are the two primary groups. On one extreme, any-occupation policies are most stringent and prevent you from receiving disability benefits if you are able to work in any job during the disability period (even if you choose not to work). Own-occupation is the most lenient type; you receive full disability benefits even if you are working in another job throughout the disability.
Transitional own-occupation is a modified version of the own-occupation definition in that you may be penalized for the salary you earn. If your disability coverage is $7,000 monthly and you’re earning $5,000 monthly during the disability, your disability benefits will be reduced to $2,000 monthly under a transitional own-occupation policy. Modified own-occupation coverage is similar to any-occupation policies because you cannot receive disability benefits if you take another position during your disability.
Three Main Groups
Now, let’s delve deeper into disability insurance policies for three distinct groups of people.
1) Covered by an employer group plan
Consider yourself blessed if you fall within this group. Typically, large employers offer short and long-term disability policies at no cost to the employees. Fifty to sixty percent of pay is the norm for an employer-provided LT disability policy. If you are not paying a premium on the disability policy, you will be taxed on the income you receive when collecting disability benefits.
I’ve noticed that government employees have different disability benefits than employees of large companies. ST disability usually is not offered since sick pay should first be exhausted, and LT disability benefits depend on the duration of the disability. The first year of disability is covered at 60%, but years 2 and beyond only offers 40% of pay. For this reason, I often recommend a supplemental policy for government employees.
Explore a supplemental individual LT disability policy if you do not feel comfortable with the level of coverage provided by your employer and no group plan is available. The insurance carrier considers your current coverage to assure you do not make more money (after-tax) as a disabled person than if you are employed.
Consult an insurance broker who specializes in disability insurance and focuses on long-term coverage. Policies and carriers vary significantly, so gain a solid understanding from the broker about the nuances of the policy (aka riders). Automatic benefit increases are helpful to keep up with wage increases. Unlike a level-term life insurance policy, LT disability premiums may increase over time -- especially those with automatic benefit increase riders.
2) Self-employed or not covered by a group plan
This group is most vulnerable to having inadequate levels of disability coverage or simply not having it at all. I have been self-employed since 2014 and am fortunate to have disability insurance through two professional organizations. The AICPA offers life and disability policies to all its members through Aon. Even in a group policy, I have the option of choosing a 13 or 26 week waiting period. The longer the waiting period, the lower the premium. Furthermore, I can specify if the policy provides coverage when I’m partially disabled and able to take another job at lower pay. This is a costlier policy because it does not require me to stay out of the workforce completely when disabled, and it falls under the true own-occupation definition of disability.
What if you are part of a profession that doesn’t offer group plans? Individual LT disability policies are likely expensive. Follow similar guidelines to supplemental policies for group #1 but also remember that you can control the duration of coverage. Consider delaying the benefit commencement date and limiting the duration to lower premium amounts. For instance, if the 13-week waiting period with lifetime benefit is too expensive, opt for a 26-week waiting period with 5 years of benefits. Exercise caution with this strategy: you’ll need enough financial resources to support the first 6 months of disability and any disability that extends beyond 5 years.
3) Stay-at-home parent
Presumably, you must have earnings to get disability coverage. Stay-at-home parents aren’t paid anything for their contribution to the household and thus typically would not qualify for disability coverage. Instead, focus on maximizing the sole income earner’s disability insurance coverage by following my recommendations above.
Want a second opinion?
Disability insurance is just one of the many topics discussed with clients during the financial planning process. Although not an insurance agent and therefore not licensed to sell insurance, I provide an independent viewpoint on the level of coverage and policy type. Please contact me if you’re interested in getting a second opinion on your family’s insurance coverages or investment strategy.
Deborah L. Meyer, CPA/PFS, CFP®is a fee-only financial planner and investment advisor based in St. Charles, Missouri who works with clients nationally. As the owner of WorthyNest, Deb helps Christian parents build wealth in a way that aligns with their values and is a 2018 recipient of the AICPA’s Standing Ovation award. Find Deb discussing finance on LinkedIn, Facebook, or Twitter.