Often when meeting with clients and we touch on the importance of disability coverage, the usual response is “Thanks, but I don’t need it as I’m covered at work.”
This leads into some tough questions that we ask:
- Have you read and understood what’s covered in your policy?
- How long do you plan to stay with your current employer?
- How long does your employer plan to employ you?
- Does the plan pay enough and how long does it pay for?
- What happens if you’re not permanently disabled?
- What happens if you’re getting money from somewhere else?
- What percentage of your income will it cover?
The next step is to review your coverage, to determine such things as both short and long term coverage and what it actually covers, etc.
Let’s look at a typical case, a 40 year-old non-smoking male in good health. He earns $100,000 annually as an office worker plus a $100,000 bonus. He has long-term disability coverage through his employer.
The issues we found: If this man were to become disabled due to an injury or an illness and unable to work at his regular occupation, he would experience a significant income shortfall, as the $5,000 monthly maximum coverage provided would fall far short of his salary and bonus. And he would only receive benefits for a maximum of two years because of his two year ‘regular occupation’ definition. Because only 27% of his income being covered if on long term disability, he did not like the shortfall exposure, disliked the coverage definition and was not sure what his future prospects were.
We looked at some options: We first addressed the income shortfall, and proposed to top up the disability income. Then we looked at enhancing his coverage to pay him until he reached age 65. The total of these two enhancements came to a monthly premium of $223.
Then we also looked at a stronger solution paying a monthly benefit of $8,670 after a 90 day elimination period for an additional $7 a month.
Disability insurance is really “Income Replacement”. If you cannot work because you get sick or suffer an injury, your disability insurance makes up for the lost income. Benefits are generally capped at 2/3 of your employment income, however it is tax-free so what you bring home is roughly the same. Benefits are also geared so that you cannot “make money” from insurance, in other words receive more than you would if working, to discourage people from living off of insurance when you could be working.
A big benefit with personally owned coverage is that if you are laid off, you don’t lose your coverage. If you change employers you may be able to adjust your coverage to work with your new employer’s plan, providing the protection you need at the lowest cost.
If you have questions or concerns about the coverage you receive through your employment, pay a visit to a trusted financial advisor to see if you can benefit from having some coverage that you own and control.
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