Disability Insurance: How Protecting Your # 1 Asset Is Often Overlooked
A Blog by Daniel Brookman of Stolly Insurance Westerville.
Imagine you are diagnosed with a critical illness like cancer or heart disease, or just survived a traumatic car accident and you’re unable to work. How long will you and your family be able to survive without your income? What sources of income will you have while you’re recovering? Will it be enough? Do you even know? These are the questions I ask my clients to consider when discussing their need for disability income insurance. Too often the resounding answer comes back that they don’t know or are unsure about how much income they would have if tragedy struck. I think it’s safe to say these aren’t the questions you want to be answering after it’s too late to change anything.
Disability insurance provides income for a specified period of time or until the insured recovers from their illness or injury and is able to return to work. Protection is offered in both short term and long term time frames with short term covering the insured anywhere from 7 days to as long as 6 months, while long term disability might not begin until after 3 or 6 months of being disabled but can last for anywhere between 1 year and until the insured turns 65. The length of time the insured has to be totally disabled before the benefit is paid is referred to as the waiting period or elimination period. Selecting longer waiting periods and self-insuring the risk in between can greatly reduce premiums similar to raising deductibles on property and casualty insurance plans. The benefit amount the insured qualifies for depends upon their income and is generally no more than 60% of their gross income amount. So for someone earning $60,000 per year or $5,000 per month, they could expect to qualify for a tax free benefit amount of $3,000 per month. The idea is to provide enough income to get by on, but not so much income that you never want to return to work.
Not every disability policy is built equal and knowing exactly what’s inside your contract is very important. Many Americans have disability insurance protection through group coverage their employer provides. While this is a great benefit there are several things to look out for when making sure you understand the group plan. For example, if your employer is paying the premiums for the plan then your benefit will be taxable because your employer is deducting the premiums on their taxes. This could mean having to live off of 40-45% of your gross income instead of 60%. Furthermore not all income is always treated equal under these group plans. Variable forms of compensation such as commissions and bonuses might be excluded and there also might be plan maximums below what you and your family need. Maybe 60% of your gross monthly income is $8,000 per month but the group policy maximum is $5,000 per month. Where will you get that extra $3,000 per month from unless you own your own individual plan? Sales professionals, business owners, and highly compensated executives are just a few of the people inside an organization who might fall victim to some of these group disability limitations. Last but not least is the definition of a disability which in my opinion is the most important wording inside the disability contract. This definition can either be own occupation or any occupation and it works exactly like it sounds. Someone with the own occupation definition of disability only has to be unable to perform the duties associated with the exact occupation they’re performing when becoming disabled, while someone with the any occupation definition would not receive benefits unless they were unable to work in any reasonable occupation based on their education, training, and experience. These are all important policy provisions and depending on the way the group coverage is written can greatly impact the amount and way benefits are received.
What if you’re one of the millions of Americans who don’t even have the group disability benefit because you either work for yourself, own a business, or work for a business too small to offer a group disability benefit? Your best option for paycheck protection is going to be purchasing a plan on the individual market. Because the benefit amount is tied directly to your earnings one way you can approximate the premium for one of these plans is to figure 1-3% of your gross annual income as an approximate premium amount. If you’re a business owner and have rent, taxes, utilities, business loans, and payroll to keep up with you can also look into a coverage called business overhead expense. This plan will pay all of your business overhead expenses while you’re disabled to keep your doors open and employees happy while you’re recovering. Some companies will even include a policy rider that will pay your business loans until either you’re recovered from your disability or the loan is entirely paid back, whichever is sooner. Having disability insurance protection is vitally important for business owners and the self-employed but frequently I see people without a plan in place. They’ll often have business insurance, homeowners insurance, car insurance, even life insurance which are all very important but they fail to protect their #1 asset which is their ability to perform the daily tasks associated with running their business or doing their job.
We’ve all heard it a million times before, “failing to plan is planning to fail” and while it is cliché we all know that it’s true. The most important advice I can give anyone on their disability insurance planning is to work with a knowledgeable professional in reviewing everything they have to be certain that they’ll be covered if disaster strikes. If you’re unsure where to start or need help reviewing your options Stolly Insurance Group has expert agents prepared to answer your questions and help you evaluate different coverages.