Hi I’m Ariel Anderson, CERTIFIED FINANCIAL PLANNER™ professional. Today I’d like to talk with you about disability income insurance.
What is disability insurance, and why is it important?
Disability insurance protects you in the event you become mentally or physically unable to work. If you were to be injured in an accident, or diagnosed with a serious illness, it may be difficult or even impossible to continue earning a living and supporting your lifestyle. In these instances, disability insurance is designed to replace a certain amount of your income. Disability insurance payments can help you continue covering your living expenses and financial obligations, so you won’t have to dip into your emergency fund or 401k, or rack up credit card debt.
Disability insurance can be short- or long-term. Short-term benefits typically kick-in after your sick pay runs out, while long-term benefits can cover chronic or permanent disability. In both cases, there is typically a waiting period before you can start receiving benefits. This depends on the specifics within the policy.
What are the types of disability insurance, and what situations do they cover?
There are many different forms of disability insurance. I’ll walk you through the most common: Social security disability benefits: You’re probably aware that social security taxes are taken out of your paycheck. Most people recognize social security as a retirement income stream, but in fact, each month a piece of that tax goes toward disability protection, too. The catch? It’s hard to get these benefits to pay out. In order to qualify, you have to meet the Social Security Administration’s definition of disabled, which is very restrictive. You have to be totally disabled by an impairment that’s expected to either result in death or last for at least 12 continuous months, and that disability must have rendered you completely unable to perform any paying job function. Not any job within your industry, or any job with a comparable salary - any paying job, period. This is known as “any occupation” coverage. And even if you do qualify, your benefit may only cover a portion of your lost wages. There’s an established maximum with these benefits, too. To learn more about the current year’s limit, check out the social security website.
Group Disability Insurance is a single insurance policy that’s offered to a defined group, most commonly to employees of the same company or organization. Your employer holds the policy, and you can opt-in to coverage. Premiums are paid through payroll deductions, making it easy to enroll and administer. And, since the insurance is based on a group, it’s usually cheaper, because the policy underwriting doesn’t account for things like individual health issues or personal factors, like age.
There are some disadvantages though. Group disability insurance will only replace a specific percentage of your salary (usually 50-60%), and most leave out bonus or commission income. This can create some gaps. Also, group policies are generally not flexible – you can’t tailor the coverage to suit your personal needs and the policy may require you to be disabled from “any occupation,” similar to social security. Lastly, this coverage generally ends when your employment ceases, or shortly thereafter.
To learn more about your company’s group disability offerings and enrollment process, make an appointment with your Human Resources representative.
Individual disability insurance is private insurance that’s based on your individual situation. You purchase a private policy to help reduce gaps left by social security or group disability insurance. Individual policies are customizable and vary in terms of how they define disability and under which circumstances they provide benefits. The most generous definition is “own occupation” coverage - which kicks in if you’re unable to perform your specific job function.
Take a foreign language translator, for example. They rely on their ability to listen and speak so they can break down communication barriers. If they had “own occupation” coverage, benefits would kick in if they lost their hearing. It doesn’t matter that the translator may be physically able to earn an income doing something else, like translating written documents; if they specified loss of hearing in their policy - it’s covered.
In addition to income replacement, you can add features, called “riders”, to your policy. Riders can increase your benefits at the rate of inflation, provide benefits for partial disability, or allow you to purchase additional coverage amounts. Riders can also provide a retirement savings benefit, which is important because you’re unable to contribute to your 401k when out on disability. The policy price is related to the protections you choose to build in, plus occupation, age, gender, and health factors.
Disability insurance is truly something you’d rather have and not need, than need and not have. As you compare which type of disability coverage may be right for you, consider the skills and abilities that are most crucial in performing your job to determine the risks you may need to insure against. Most importantly, understand how your policy defines disability and any limitations it might impose.
Thanks for watching.