Disability Insurance: More is Better
You may think you don’t need disability insurance — but you probably do.
Whether you have group disability insurance from your employer or buy it yourself, chances are you’re underestimate and may not be able to afford what you need for short-term or long-term insurance in the event of sickness or injury.
Even if you have group disability insurance, it may not be enough. The drawbacks include:
- Coverage may be limited to a short term, perhaps only two years,
- Coverage may have dollar limits, and
- The wait for benefits to start may be longer than your savings will last.
For these reasons, you may want to buy individual disability coverage to supplement existing group coverage or to provide protection lacking in that plan.
Here are eight tips to keep in mind when shopping for a disability policy:
- Be aware of the tax impact. If you pay with after tax dollars, the monthly insurance payments aren’t taxable. If you pay with pretax dollars, they’re taxable.
- Prepare for the level of difficulty you’ll face. People in professional occupations have an easier time getting disability insurance. Those who work in riskier occupations, such as construction, typically face a much more difficult time procuring coverage.
- Estimate your premiums. Yearly premiums depend on the amount of insurance — $150,000 may cost around $3,000 a year. Most people buy only the amount they can afford.
- Check your employment benefits. The cheapest route is getting disability insurance through your employer but, if you leave your job, you’ll lose the coverage.
- Consider joining a professional organization. Members of such organizations may be able to buy a group policy that costs less than an individual policy on the open market. If you get a policy through an organization, be sure it allows you to keep it as long as you remain a member.
- Look at the exclusion period. Under most policies, you have to be disabled for a number of days, usually 90, before payments start. Premiums are higher if you want the insurance to kick in earlier.
- Beware of age limits. Generally, disability payments stop between the ages of 65 and 70. Make sure you have plans and savings that last beyond that. If you’re 55 and have a lot of money saved up, you don’t need as much disability insurance as someone who is 30 and doesn’t have a big savings account. Disability insurance policies cover only 60% of your income. You can buy another policy that covers the rest.
- Review the income limits. Typically, benefits are pegged to your income before a disability. You can probably buy coverage that pays only 60% to 80% of your income from all sources. (That’s about what you’d get in your paycheck after taxes.) For example, if you earn $10,000 a month, insurers might not want you to have more than $6,000 to $8,000 a month in disability benefits. With group coverage, you might qualify for another $2,000 in supplemental individual benefits.
Here are a few other factors to consider and discuss with your insurance advisor when shopping for disability coverage:
- Try getting individual coverage first. Get the most coverage you can, based on your income. Then you may be able to get additional coverage with a group plan. If you start with group coverage, insurers probably will put a limit on individual coverage.
- To cut costs, consider a policy that pays until age 65. This would be a smarter move than buying a policy that pays lifetime benefits. If the purpose of disability insurance is to replace lost income, you might not be earning income after 65 anyway, so the extra coverage would be superfluous. This is particularly true if you have other assets you can tap into. However, without those assets, you may need lifetime benefits. If so, you can cut costs somewhat by extending the waiting period before benefits begin to 90 days or longer.
- Check into how a policy defines “disability.” An “own occupation” policy provides benefits if you can no longer perform the duties in your customary job. Other policies only pay if you’re unable to work at any job that you’re reasonably trained to do.
The Limits of Federal Aid
Federal Workers’ Compensation and Social Security disability payments might help if you become unable to work. But the payments are limited and you may not qualify for them.
Many applicants for Social Security disability benefits are turned down. And Workers’ Comp pays only if you’re injured on the job. If you become disabled in some other way, you’re out of luck.
Please contact Alex Seleznev via our online contact form for more information.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.