Long-Term Disability Insurance

What is your most important asset? This question will receive a myriad of answers. Some will say it is their home, others an art collection and others will say it’s their investment portfolio. But let’s assume for a moment that you have not yet accumulated the necessary nest egg required to meet your retirement goals and objectives.   In this case, I would argue that your most important asset is your ability to earn income.

Now imagine what would happen if this valuable asset was unexpectedly taken away  because you suddenly became disabled and unable to work—and worse, you are not insured against this risk.  You may think the odds of such an occurrence are minimal but look at these statistics:

The Chances of a Disability Occuring

  • For three months or more – 1 in 3
  • For one year or more – 1 in 5
  • For five years or more – 1 in 7

Sources:  American’s Health Insurance Plans, National Association of Insurance Commissioners, U.S. Commerce Department

After considering these staggering numbers, wouldn’t everyone acquire disability insurance?  The answer is no. Unfortunately, some feel the cost exceeds the benefit, especially when Worker’s Compensation and Social Security are available.  If you should become disabled, most people believe that these sources should be sufficient, but that’s doubtful. Worker’s Compensation covers only a portion of your salary and only if the illness or injury is related to your job.  Roughly 90 percent of disabilities are not work-related according to the National Safety Council.

What about Social Security?  Applying for benefits does not mean you qualify.  As a matter of fact, roughly 60 percent of Social Security applications for disability are denied, and even if they are approved, payment levels can be modest.  That brings us back to disability insurance.

Most disability insurance in the United States is offered through employer-sponsored plans, which pay between 40  and 60 percent of your base salary. But beware! Most benefits derived from group policies are pre-tax, which means that after accounting for taxes, your income is further reduced.  If you secured an individual disability policy and it is paid with after-tax dollars, the benefit awarded to you is generally not taxable.  You should also confirm with your group policy whether or not the benefit is limited to a specific time period.  In other words, does it last two years, five, or for your lifetime?

If you find gaps in your group policy, you may consider purchasing an individual disability policy. But be mindful that each insurance company has its own product. Definitions, as well as benefits, can vary—meaning you may be comparing apples with oranges.  One of the most important terms to understand is the definition of ‘disability.’  For example, some policies consider a policyholder to be disabled if they are unable to perform the duties of a specific job. You may see the terminology ‘Own Occupation.’  Other policies are structured as ‘Regular Occupation,’ meaning that if the person disabled can perform another job—even making only a fraction of the current income—the person is not considered disabled and therefore can’t collect benefits from the policy.  There are other issues to consider. You should confirm whether or not a policy covers partial disability;  provides inflation protection and whether or not the insurer can raise the policy premiums. Some policies guarantee a rate and the premiums are not allowed to increase over the life of the policy.

If your most precious asset is your earning power—and you haven’t protected that asset against disability—it may be time to visit with your Moneta Family CFO who can assist you with evaluating options to mitigate this risk.

Brooke Hunady, CFP®

Brooke is the professional consultant for Tim Halls

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