IS YOUR EMPLOYER-OFFERED DISABILITY PLAN ENOUGH?
Many employers offer group disability insurance as a benefit to their employees. But, it's not always enough to cover your income if something was to happen.
No matter how safe your place of work is or how much effort you put into taking care of yourself, debilitating disabilities happen. These illnesses and injuries can have you out of work for weeks or even months while you recover and negatively impact your income.
Many employers offer disability income insurance to their employees as part of an overall benefits package. (You know, that big stack of paperwork you had to read through and sign upon hiring or promotion.)
Employer-sponsored disability insurance is a beneficial perk that can help support your lifestyle if you become disabled. But, it’s not always enough.
We know it’s important to protect your family’s income and lifestyle when you’re out of work. So, let’s talk about how disability income insurance can help safeguard your family’s finances.
What is the purpose of having disability insurance?
Your income takes a hit when you’re out of work and recovering from a disability or injury. Without a steady paycheck, your family’s finances can be in jeopardy.
Disability insurance helps to soften the blow by supplementing your income after you’re injured or diagnosed with a long-term illness. This form of income insurance helps cushion your finances and buys time for you to recover without worrying about how you’ll put food on the table or keep the lights on while you’re out of work.
There’s a good chance for a disability to occur during your working life. In fact, according to the Council for Disability Awareness, one in four of today’s 20-year-olds will become disabled before reaching retirement age.
That means they could be out of work for a significant length of time during their peak earning years.
According to the same research, a healthy 35-year-old woman with an office job has a 24 percent chance of becoming disabled during her career. A disability for such a woman lasts for an average of 82 months.
Bills keep coming even when you’re not working. Food, utility bills and mortgage payments don’t stop just because you’re laid up at home recovering or working fewer hours because you’re too hurt to work as much as you’re used to.
Disability insurance helps to bridge the gap from not working as much or at all. It provides steady income to you and your family when your main source of income is hindered.
As with most types of insurance, you hope you’ll never need disability insurance. But, it provides a peace-of-mind that if something were to happen your financial needs will still be met.
What does disability insurance cover?
You’re considered disabled when an illness or injury leaves you inhibited from performing your work duties. While the exact definitions differ slightly depending on your insurer, your disability status is broken down into “partial disability” or “total disability.”
In general, partial disability is when you’re unable to perform the essential duties of your job. You may have lost some degree of function in a body part that prevents you from doing the same sort of work you did before.
Partial disability could be a shoulder injury that leaves you unable to lift heavy boxes at work. You may switch into a less physical role, but could end up working fewer hours as a result, contributing to a loss in your usual compensation. An illness could also lead to partial disability.
Total disability is when you’re totally unable to perform the basic duties of your job. Total disability usually stems from the loss of two limbs or your eyes. Total disability can also be the result of a severe, long-term and debilitating illness, such as cancer.
Whether you’re considered partially or totally disabled, your disability insurance coverage will kick in after a specified period of time set by your insurer. This waiting or “elimination” period usually lasts anywhere from 90 to 365 days depending on your policy and chosen coverage.
You’ll start receiving your benefits after the waiting period. Your benefits will continue until you’ve either recovered or you’ve met the length of the benefit period — how long your disability income insurance policy will pay out benefits.
Your benefit period may also end upon collecting the full extent of your allotted benefits.
Benefit period mays last anywhere from a few months to a few years, depending on your specific disability insurance plan and your insurer.
Who needs disability insurance?
The short answer is: everyone.
According to LIMRA, it’s a common myth that disabilities are only the result of serious accidents. This belief couldn’t be further from the truth.
Though accidents and physical injuries can cause disabilities, it’s actually illnesses that cause over 90 percent of disabilities.
Unfortunately, you never know when you could become disabled. One day you might be fully capable of performing your job until your back goes out or your doctor diagnoses you with a critical illness. What do you do then?
Unless you’re lucky enough to not need a steady income, you need to have disability income insurance. Otherwise, your savings and emergency fund can dry up quickly.
If your income serves to pay your bills, feed your family and keep a roof over your head, it’s important to protect it with disability insurance.
Is your employer-offered disability enough?
The Bureau of Labor Statistics reports that 93 percent of workers in the private industry are covered by an employer-sponsored disability insurance policy.
These plans are usually short-term disability insurance policies. Some states even require employers to provide this coverage.
Based on your financial situation, health and comfort level, this coverage might be enough to give you the peace-of-mind you want. There are some downsides to employer-offered disability insurance, though.
How strong is the plan?
Employer-offered disability insurance plans can be strict on classifying disabilities before paying out. You may not be considered “disabled enough” if you’re not totally disabled. This would prevent you from supplementing your income despite being out of work from a partial disability.
Benefits may be taxable
Benefits from employer-sponsored income insurance policies are sometimes taxable. If your employer pays the premium for the policy, your benefits will be taxed as earned income. That is unless the cost of coverage is included as part of your gross income.
If you pay some of the premium, you won’t be taxed on the percentage of your contribution if you’re paying with after-tax dollars (money you’ve already been taxed on).
This isn’t the case with policies you’ve purchased on your own. That's because you’re paying for the premium with after-tax dollars.
Benefits may be offset
Benefits you receive through an employer-offered disability plan are usually reduced, or offset, by the amount of benefits you receive through Social Security disability payments or worker’s compensation.
Many group disability insurance policies will require you to apply for Social Security disability benefits when you file your disability claim. Any benefits awarded by Social Security or worker’s compensation would reduce the benefits paid to you by your employer-sponsored plan.
While you’d still be receiving the same amount of benefits per month, offsetting allows the insurance company to shift some of the burden to another entity.
The intention behind offsetting is that you’re never earning more from disability benefits than you would be when working. It’s an incentive for you to return to work as soon as you’re able.
The majority of group disability insurance utilizes offsetting. Offsetting isn’t a common practice when it comes to individual disability insurance that you purchase and pay for on your own.
What happens to it when you leave your employer?
Disability income insurance isn’t intended to replace your income if you become disabled. Its purpose is to supplement your income until you’re well enough to return to work.
As such, disability insurance doesn’t follow you when you leave, quit or are terminated by your employer. And unlike health insurance, there’s no COBRA provision that allows you to extend coverage.
If you leave an employer that sponsored a disability insurance plan and your new employer doesn’t offer one, your only other option is to buy a private disability insurance policy.
Luckily, if you’re already collecting disability benefits and quit or are terminated, you’ll continue to receive those benefits until you’ve expended them all or you’ve recovered. As long as you were employed at the time you submitted your claim, you’ll continue to receive your benefits.
Short-term disability vs. long-term disability insurance
Most plans offered by employers are short-term disability insurance policies. Some employers may offer long-term disability income insurance as well. But, they generally expect you to pay the premiums yourself.
In either case, employer-sponsored disability insurance is more restrictive than indpendent disability income insurance. The benefit period is usually on the shorter end of the spectrum. And, you may find that benefits stop being paid out as soon as you’re able to return to work - even if you still have time left in your benefit period.
Your employer obviously wants to incentivize your eventual return to work. Who can blame them?
But, you also need to look out for your family’s financial well-being with a disability plan that provides enough for you and your loved ones while you recover.
Short-term disability insurance
Employer-offered short-term disability plans have a median benefit period of 26 weeks. They are, on average, capped at 60 percent of your salary, according to the Bureau of Labor Statistics. Your monthly and annual benefits may also be capped at a maximum defined by your policy.
It’s your salary that’s capped as well, not your income. Commissions and bonuses aren’t taken into account when calculating your maximum benefits. As a result, your income from employer-sponsored disability benefits may be substantially less than when you were working.
If something were to happen to you that stopped you from working, could you and your family get by with 40 percent less income while you recovered? How long could your emergency fund and savings help sustain your lifestyle while you’re on the mend?
Short-term disability insurance:
- Has an elimination period of 14 to 30 days on average
- Has a benefit period of six to 36 months
- Caps your benefits at 60 percent of your salary on average
By the end of your benefit period, you’ve hopefully recovered and can return to work, but what if that’s not the case? What if your disability is more long-term or you’re considered totally disabled and unable to work again?
That’s when long-term disability coverage would kick in.
Long-term disability insurance
Long-term disability insurance applies to those whose disability will keep them from working over a long period of time. A diagnosis of cancer or permanently losing your eyesight would more than likely keep you out of work for awhile — if you’re even able to return at all.
There’s no overlap between short- and long-term disability insurance policies, either. Only one policy at a time pays out benefits, even if you’re covered by both.
Your long-term disability insurance policy would start paying out benefits when you’ve exceeded your short-term benefit period if you’re covered by both types of policies.
As such, long-term disability insurance has a longer waiting period than short-term income insurance. In general, the average waiting period for most long-term disability policies is 90 days after becoming disabled.
The benefit period is understandably longer too. It lasts anywhere from two to five or 10 years. Some plans may even last until you retire or for your entire life, depending on your insurer and your budget.
In summary, long-term disability insurance:
- Has an elimination period of 90 to 365 days
- Has a benefit period of two, five or 10 years, or until retirement or as long as you live
- Can’t overlap with the benefit period of a short-term disability claim
In essence, short-term disability insurance protects your income from minor illnesses and injuries that you’re expected to recover from in a matter of months or a year or two, if that.
Long-term disability insurance is designed to supplement your income from illnesses and injuries that’ll take months or years to recover from, if you ever do.
What does a private disability insurance plan cost?
There are a few factors that contribute to the cost of disability insurance, whether you’re considering short-term or long-term insurance. They are:
- Waiting period length
- Benefit period length
- Your occupation/percentage of manual labor you’re responsible for
- Desired coverage (income and monthly benefit)
So how do you calculate what benefits you need when it comes to purchasing disability insurance?
That depends on your financial needs and comfort level.
Ask yourself these questions:
- How much are my family’s monthly expenses?
- How long will my savings and emergency fund last without any income?
- What is the likelihood that a disability will keep me from working and for how long?
Answering these questions can help you pinpoint what waiting and benefit periods you’re comfortable with and help you adjust the cost of disability insurance.
For instance, using our online quote tool, a non-smoking 35-year-old man from Massachusetts who earns $50,000 per year can purchase long-term disability insurance with a $50,000 lump sum benefit for only $22.00 per month.
It’s a small price to pay to protect your income while you’re recovering from a disabling injury or illness.
How Social Security Disability Insurance differs
Why do you even need disability insurance if the government provides a safety net through Social Security Disability Insurance, or SSDI?
Well, in order to qualify for SSDI, you need to have worked for a certain amount of time in the recent past and to have a condition severe enough that it impacts your ability to work.
As an example, in 2016, there were over 2.3 million applications for SSDI.
Only 32.06 percent of those applications were awarded benefits, with an average monthly benefit of $1,282.
As helpful as SSDI is to some people, you can’t bank on being approved for SSDI benefits if you become disabled.
Short-term and long-term disability insurance is guaranteed to pay out to you once you’ve been disabled. It provides a dependable safety net to you and your family that protects your income while you spend time recovering.
Disability income insurance helps you and your family maintain your lifestyle at a time where you’re unable to work at your full capacity. It buys time for you to focus on recovery instead of worrying how you’ll make ends meet.
Disability insurance is something you hope you’ll never need to use. If the time comes where you need it, you’ll be relieved that your financial reality isn’t shattered by a disability.