Here are a couple of interesting statistics for you:
- Just over 1 in 4 20 year-olds will become disabled before they retire*.
- Only 5% of disabling accidents and illnesses are work related. The remaining 95% are not, meaning Workers Compensation doesn’t cover them**.
- During your career, you are 3.5 times more likely to be injured and need disability coverage then you are to die and need life insurance***.
Most worker’s largest asset is usually not their 401(k), their house, or even their yacht. The typical worker’s prime asset is their ability to earn income over the course of their life. Like any asset, you should try to protect it as best you can. While I see many people taking steps to invest more wisely, protect their loved ones in the event of an unexpected death, or even endlessly research the best homeowners’ policy, often people tend to neglect disability insurance.
Let’s look at an example we often see as we review client situations:
Betty is a cardiologist who earns $250,000 per year. She is 40 years old, married with two young children, and is the breadwinner in her home. Betty just paid off her medical school loans (finally!) and has started saving more money towards her retirement. She works for a small medical practice, which generously provides her with life insurance as well as short-term and long-term disability insurance. Betty sleeps well at night knowing she is protected.
Sounds like Betty is on the right path, right? As with most financial decisions, the devil is in the details. For now, let’s take a closer look at the disability policies she has:
Short-term Disability Policy
- Will begin paying Betty 60% of her monthly salary, or $12,500 per month, after she has been disabled for 30 days.
- She will receive this amount until the 180th day of disability, after which benefits will be paid by her long-term disability plan.
- Given the premiums are paid by the medical practice, the funds received will be taxable to Betty.
Long-term Disability Policy (LTD)
- She will be considered disabled if she is unable to work in ANY occupation at the 181st day of disability.
- Begins paying Betty 60% of her monthly salary, up to a maximum of $5,000 per month, beginning on the 181st day of disability.
- The length of coverage is for the lesser of 5 years or when she turns 65.
- Any disability benefits received from Social Security will decrease benefits received from the policy, dollar for dollar.
So while Betty feels comfortable knowing she has a policy in place, the question becomes do the policies sufficiently protect Betty if she were to become disabled?
In my opinion, the short-term policy is probably sufficient given there is no cap on the benefit, so Betty will receive a full 60% of her pay for 180 days. This is a nice benefit, therefore it serves its purpose knowing nothing else of Betty’s situation. As for the LTD plan, I would consider it insufficient for the following reasons:
- Betty will only be considered disabled if she can’t perform the tasks of ANY job considered suitable based on her age and education, not just her OWN (current) occupation. We typically only recommend clients using LTD policies with a True Own Occupation definition.
- Betty will receive a maximum benefit of $5,000/month if she is disabled. Her current salary is $250,000, or $20,833/month. Therefore, the insurance benefit will only replace 24% of her gross salary. And since the company is paying the premiums, the $5,000 will be taxable to Betty upon receipt.
- The policy will pay out over a maximum of 5 years. So if Betty has a disability lasting longer than 5 years, she will need to come up with the money elsewhere.
We see these types of situations all of the time. If you are still working, it’s critical to review the disability insurance offered through your employer. In Betty’s case, the employer LTD coverage is insufficient. Therefore, we’d recommend Betty look into buying additional LTD insurance to ensure she is adequately covered in terms of dollars and length of time. Generally, we recommend covering at least 60% of your current gross income until 66 or 67 when full Social Security retirement kicks in.
If you think you are underinsured, the DI market place offers a wide range of potential solutions. Although it isn’t cheap, DI allows you to protect your biggest asset, your earning power. While we don’t sell insurance, we review client situations often to ensure their coverage is appropriate. If you’d like to have us analyze your current situation, please feel free to reach out.References: *US Social Security Administration, Fact Sheet, 2/7/13 **Council of Disability Awareness, Long-Term Disability Claims review, 2013 ***Health Insurance Association of America, 2000