Why Your Employer’s Disability Insurance May Not Be Enough

Everyone wants to be a hero – to have that impact where they “protect” someone from a danger – dashing into a house on fire to save a baby.  And in life, we protect many things, some valuable – our house and life  – and others that are not so valuable.  The reason we protect things is that they are important to us. However, we often neglect protecting one of our most important assets and that is our earning power – the income we generate that pays for our basic expenses – housing, food, education, etc.

The name of this protection is disability income insurance.   Disability insurance provides protection against the potential loss of income due to a disability.  While group long term disability insurance is part of most employee benefit packages, it is commonly overlooked and undervalued.  Disability insurance is one of the most important coverages that you can have.   As Linda Robertson pointed out in her blog post “Are You Aware That May is Disability Awareness Month,” the odds are high that an individual will suffer a disability at some point in their working career.  The disabilities are mostly not permanent. However, they can be long enough to cause financial problems.

Disability insurance can seem easy to understand on the surface: you pay a premium and if you become disabled, the insurance company replaces your income.  Under the surface, there are important nuances that can affect your insurance.  It’s important for an employee to understand that a disability covers any qualifying disability event whether or not it’s work related and that it’s for more than injuries. It also covers illnesses.

What’s the typical group long term disability insurance coverage?

Group long term disability insurance coverage typically replaces 50-60% of base income after a 90 day waiting period (on a pre-tax basis).   Coverage is usually capped at $10,000 to $15,000 of total monthly coverage. Employers sometimes will offer supplemental coverage which will allow you to purchase an additional 10% (for example) of coverage subject to underwriting.

Does group disability insurance coverage take care of all my disability insurance needs?

Most likely not. Two key points: 1) bonuses and commissions are not always covered and 2) most plans cover income on a pre-tax basis – so whatever benefit you receive is subject to income tax.  If your company offers the option to pay premiums on an after-tax basis, you should consider it as the benefit you receive would not be subject to income taxes.  Group disability plans do not always cover partial disabilities, residual disabilities or provide cost of living adjustments among other things.

Most group long-term disability insurance policies available through an employer are paid on a pre-tax basis and cover 50-60% of your base salary up to a certain cap (some plans do cover commissions & bonuses).  For example, if you have a $72,000 annual salary ($6,000 monthly) with a $5,000 annual bonus with 50% pre-tax coverage, here’ s how it breaks down, assuming that you are in a 35% over-all tax bracket:

Current pre-tax annual income: $77,000 (after-tax annual income of $50,500)

In the event of a disability – the calculation would work as follows: $72,000 (salary only as bonus is not covered) times 50% (amount of coverage) resulting in a $36,000 pre-tax benefit and at the same 35% tax rate  – an after-tax annual benefit of $23,400.  Therefore, in this example, the employee would receive only 46% of their current after-tax income in the event of a disability.  If you have a higher bonus or commissions that aren’t covered or if you exceed the monthly maximum benefit, your percentage of take-home pay will be even lower.

Other things to keep in mind regarding your group disability insurance coverage – both the basic and (supplemental coverage if available) – is  it portable (can you continue it, if you part ways with your current employer) and is it cost-effective?  You can usually find individual disability insurance policies that are less expensive or provide more customized benefits, especially if you’re in great health.

Every disability insurance policy has certain core definitions and parameters that can differ from company to company.  These can include the amount of benefit, the benefit period, the elimination (waiting) period, how disability is defined and riders such as partial disability rider, inflation rider, etc.

To learn more about the odds of disability and other statistics along with your personal disability quotient, you can visit the website for the Council on Disability Awareness.  Or you can pick up a copy of the just released “The Questions and Answers on Disability Insurance book which features worksheets, statistics, policy definitions and everything you need to know about disability income insurance at www.lifeinsurancesage.com .


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