A disability insurance policy provides income protection in the case of disability or illness. Most people insure their home, car, health and life, yet many neglect to insure their earning power, or human capital. The odds of suffering a long-term disability is several times greater than the odds of death. The average 40-year-old has a 45 percent chance of becoming disabled for three months or longer before reaching age 65.
Who does NOT need disability insurance?
- People who are financially independent and have other assets to “self-insure” the risk of becoming disabled.
- High income, dual-earning couples who can live off one income.
- People approaching their mid-60s, as most policies only pay to age 65 or 67. Essentially, the policy would cost the same amount of money for 5 or so years of benefits that someone in their 30s would pay for 30 years’ worth of benefits.
When do you need it?
Since it’s nearly impossible to predict disability or illness, purchasing a policy earlier is generally better. Over 85 percent of disabilities are caused by illness rather than accidents, so younger, healthier people stand to benefit the most. Moreover, premiums are lower for those that purchase a policy earlier in life.
How much do you need?
The answer to this question varies and is often a combination of need and comfort level. Insurance companies won’t replace 100 percent of income lost, as they want to provide an incentive for the disabled to go back to work. Generally, insurance companies limit the benefit to about 2/3 of salary, with a max individual policy benefit of approximately $15,000 – $17,000 a month for domestic coverage. When thinking about needs and comfort level, ask yourself the following questions:
- What amount would allow you to sleep at night?
- If you couldn’t work tomorrow, what would your family do? Would your spouse go back to work or pick up more hours?
- If both of you are high income earners, could you live off one spouse’s after-tax salary?
- Do you have a decent retirement nest egg, or will you need some of your disability income to save for retirement? What about your children’s education expenses?
- How long could you wait before the benefits kicked in?
Do you need an individual disability policy even if your employer offers a group benefit?
Most people think they’re adequately covered through their employer and do not understand how group coverage works. Group policy benefits are convenient, inexpensive, and do not require a medical exam. There are drawbacks to group coverage, however, including:
- Definition of disability – Typically, the policy will provide coverage in line with your own occupation for two years. After this period, the definition of disability changes to any occupation. Insurance companies differ on the types of language they use to describe what they consider any occupation, which means you could be required to work in areas outside of your education and experience.
- Partial disability coverage – If you can return to work part time, your loss in earning power may not be adequately covered. For example, a residual rider provides a benefit based on the percentage of income you earn working part-time in relation to what you used to earn working full-time.
- Benefits are capped – Group policies limit benefits to approximately 60 percent of pre-disability income, only include base salary, omit incentive based compensation, and typically are capped at $5,000 – $15,000 per month.
- The benefit is likely taxable and the benefit period may not last until retirement.
- There may be various deductible sources from the group benefit, including Social Security disability income and potentially individual policies.
- Group disability insurance is not portable – If you leave the company, you lose the benefit.
Vista has planning tools and resources to help determine a budget, address income needs, and work through the what-ifs to ensure that you protect and grow your wealth, even in the event of a disability.