Did you know you are more likely to be disabled for at least 90 days before age 65 than to die? Despite this, many people either don’t have disability insurance or rely solely on their employer’s coverage. Often, those relying on employer‐provided insurance haven’t read the policy due to its complexity. Even those who purchase their own disability insurance may not fully understand their coverage.
The Basics
Your most valuable asset is your ability to earn an income. If you become disabled, disability insurance will replace a portion of your pre‐tax income. Here’s what you need to know:
Group Policies
- Benefits: These typically cover 60‐70% of your pre‐tax income, but there are nuances. Some policies cap benefits at 50%, and most have a monthly income cap (e.g., $5,000). High earners may not replace anywhere near 60‐70% of their income. Bonuses are usually excluded.
- Offset: Social Security disability payments often offset dollar‐for‐dollar what you receive from a group policy.
- Definition of Disability: Group policies usually define disability as being “unable to perform your regular work” for a limited period. After that, the definition often changes to “unable to engage in any substantial gainful activity,” similar to Social Security, which can significantly impact your benefits.
- Taxes: If your employer pays the premium, your benefits are taxed. If you pay the premium, your benefits are tax‐free. Check if you pay your premium pre‐ or post‐tax by looking at your paycheck. Paying taxes on 60% replacement income can substantially reduce your available funds for critical expenses.
- Job Loss: If you lose your job, you lose your disability insurance coverage. If you have pre‐existing medical issues, buying an individual policy may be challenging.
Individual Policies
- Supplemental Coverage: You can buy a supplemental individual policy to cover the income shortfall. While it won’t cover 100% of your income, it can help you reach 60‐70% tax‐free, which likely meets your needs.
- Definition of Disability: Individual policies often maintain the “unable to perform your own job” definition, providing more consistent coverage.
- Social Security Offset: These policies are less likely to offset Social Security payments.
- Continuity: Your policy remains in force as long as you pay the premium, even if you change jobs or earn a lower income.
Additional Considerations
Consider buying an individual disability insurance policy in your thirties or forties when premiums are still low. When determining the amount of coverage to buy, it’s important to factor in inflation. For instance, if you sign up for disability insurance benefits of $60,000, which is 60% of your current income, this amount will not be sufficient in 15 or 20 years to cover the same cost. Adding an inflation rider and purchasing additional insurance (without a medical exam) can help maintain the value of your coverage over time.
Disability insurance involves many details. We can help you understand your policy and integrate it into your financial plan to determine the best coverage you can afford.
