Benefit open enrollment season is here, and one of the most commonly misunderstood and overlooked areas is disability insurance. Disability coverage typically costs between one and three percent of your income, which is more than life insurance, but for good reason. The chance of being disabled during work years is typically higher than your chance of dying, so why do so many of us purchase life insurance without ample disability coverage?
As you prepare to make your benefit decisions for 2019, here are a few things worth considering about disability insurance.
Disability is more common than you think
More than one in four of today’s 20-year-olds will miss a year or more of work because of a disability before retirement age, but only one in three U.S. workers in private industry has disability insurance through work. The average long-term disability claim is 34.6 months. Could you comfortably maintain your current lifestyle, including saving for retirement, with no earned income for three years (or ever)?
Know the definition
It’s important to understand how your policy defines disability. Are you considered disabled if you can’t do your current job, any job you’re reasonably qualified to do, or any job? Also pay close attention to what happens if you return to work gradually or part-time, or if you face a disability recurrence.
How coverage works
Typically, disability benefits last up to age 65, but benefits could pay out for just two years. Often benefits equal two-thirds of your income, capped at a pre set amount. If you are a high earner, that cap could be an insufficient amount. Be sure to check the definition of income in your policy. It often excludes commission or equity income.
Benefits aren’t always tax-free
Benefits are only tax-free if premiums are paid with after-tax, not pre-tax, dollars. For high earners, paying with after-tax dollars almost doubles the value of potential benefits. But most group plans are paid with pre-tax dollars.
Your back-up might not be realistic
There are a lot of reasons people opt out of disability coverage, some more valid than others.
Not everyone is eligible
If you’re not in a traditional employment situation, understand the barriers for obtaining disability insurance.
Going beyond your employer
Your employer isn’t the only place to purchase disability insurance; you may also be able to buy coverage in the individual market, and policies often can have unexpected benefits. Some insurers protect your ability to save for retirement. Others offer student loan protection. Physicians in residency training can buy benefits of $7,500 per month in addition to coverage they have at work in anticipation of higher future earnings. There are often benefits that go beyond what you’d expect.
No matter where you are in your financial life, understanding the ins and outs of disability insurance and determining if it’s right for you is of huge importance. If you’re interested in learning the right decision for your family, Hogan Financial can help. Please reach out to Clint Wondra with any questions.
Originally published: November 1, 2018