Why do we think we’re so invincible?
When we hear the phrase long-term disability insurance, many assume that this is needed much later in life or possibly not at all if we consider ourselves active and healthy. Yet, if you become ill or injured before you retire, do you know how you would protect your income?
According to the CDC, more than 61 million adults have a disability and approximately half of the disabled population are age 64 and younger. In 2019, the employment-population ratio for people with a disability between ages 16 to 64 was nearly 31%, while the ratio for persons without a disability in the same age group was nearly 75%. These statistics alone make a case as to why it is important to have a plan in place to replace your income in the case of disability, especially beginning earlier in your career.
Income protection comes in the form of Social Security disability insurance, short-term disability insurance, long-term disability insurance and workers’ compensation.
Some may choose to rely on Social Security Disability Insurance (SSDI) for disability income, a program that many Americans earn by paying a Social Security tax. Individuals must pay into SSDI for a certain number of years (depending on age of the disability) before they would qualify for these benefits. Eligibility criteria is stringent and fewer than half of SSDI claims are approved for benefits, making this a less reliable option. The average monthly benefit SSDI granted to disabled workers in the US in 2019 was $1,4901.
The amount of income provided by SSDI (if an individual is lucky enough to be approved) is not enough to fund expenses for most families. Therefore, we almost always recommend the purchase of a long-term disability insurance policy for income earners. These policies are a cost-effective way to protect yourself financially if you lose the ability to work. It is best to purchase disability insurance as soon as you begin your career to begin protecting you and your family. Premium rates increase with age, so the earlier you purchase the policy, the lower your premium will be. Most policies also lock in the annual rate. Here are answers to a few commonly asked questions about long-term disability insurance that we hear in the planning process.
What does a long-term disability insurance policy cover?
There are generally two types of coverage a disability insurance policy provides. These are often referred to as “Own Occupation” and “Any Occupation”.
- Own occupation policies provide coverage if the insured cannot perform his or her regular occupation. This type of coverage is optimal because it allows the disabled individual the option to earn income from a different occupation while collecting unemployment. For example, if a surgeon can no longer perform surgery due to a disability affecting his or her hands, he or she can collect disability income and move to a different career that can generate cash-flow.
- Any Occupation policies will only provide coverage if the insured is disabled from all occupations and can no longer work at all. This type of coverage does not allow the insured individual to earn income while collecting disability.
An important, and often missed provision is a hybrid of the two options. Some policies provide Own Occupation coverage for a specific period of time (typically 24 months) and then will only provide coverage after that period if you are unable to perform Any Occupation. Other policies offer partial disability coverage (covers a partial loss of income) while some exclude coverage from certain pre-existing or mental conditions.
When will benefits begin and how long will they last?
Each disability policy has an elimination period that refers to the number of days that must pass between the injury/qualifying event and the day benefits begin. It is like a deductible you would pay for a claim on a homeowners or automobile insurance policy – just measured in time. Elimination periods can range from 90 days to 24 months. The second factor to consider with an elimination period is if the number of days need to be consecutive or if they allow the insured to accumulate over time. For example – if the insured has an accident and used 45 days of the elimination period, and then is injured again or their initial injury worsens, will credit be granted for those days or will the elimination period start over?
Alternatively, it is important to know when coverage ends. Some policies pay for a specified period of time while others pay through a certain age (typically 65 or 67).
What is the amount of the benefit?
Each policy will have a monthly maximum benefit equaling a specific dollar amount and/or a percentage of your salary. There are options/riders available on most policies to increase the monthly benefit by a certain percentage annually. Some riders begin to increase the amount immediately after purchase whereas some only increase once benefits are commenced.
While many may work directly with an insurance agent for a policy, a financial planner can be a neutral resource to help you determine how much insurance to purchase. It is important to work with a financial professional whose compensation is not tied to the commission on the sale of policies, so you will receive advice in your best interest.
Disability insurance can be complex, and you do not have to navigate it alone. Reach out to a trusted advisor like Budros, Ruhlin & Roe to guide you and your family.
Samantha Anderson, CFP®
1 Source: SSA.gov