Why everyone should consider individual disability insurance

by Badgley Phelps | May 06, 2019

According to the Council for Disability Awareness, “More than one in four of today’s 20-year-olds can expect to be out of work for at least a year because of a disabling condition before they reach normal retirement age.” Don’t think it applies to you? The most common reasons cited for short-term disability claims are incredibly common conditions: pregnancy (25 percent) and musculoskeletal disorders including problems with the back, knees or hips (20 percent). For long-term claims, the most common reasons also include musculoskeletal disorders (29 percent) and pregnancy (9.4 percent), but add cancer (15 percent)—and the average long-term disability claim is 34.6 months.

With that in mind, it’s important to consider individual disability insurance sooner rather than later.     

What is disability insurance?

Disability insurance is important and needs to be a part of any worker’s contingency plan. It is insurance to replace part of your paycheck when you’re unable to work due to sickness or injury. If you have a family that depends on the paycheck you bring home, disability insurance is even more important: View it like life insurance. In this context, group coverage through your employer is insufficient and should be viewed as a complement to, and not a replacement for, individual disability coverage.

Following are the two types of disability insurance. 

  1. Short-term disability insurance: This can cover up to 80 percent of your income for a short period of time, usually three to six months. Its elimination period, or the waiting period after you’ve become disabled and before you start receiving benefits, is short—typically 14 days or less—and it is usually provided by employers.
  2. Long-term disability insurance: This is for longer periods of time including two, five, or 10 years, or until retirement. The elimination period is normally 90 days but can run from 30 days to two years. Long-term disability traditionally covers up to 60 percent of your salary.

Other solutions are available for individuals with unique and high limit risks. Policies can be purchased as standalone coverage or in addition to a traditional policy.

Considerations for high income or high net worth individuals

Workers in any industry should take into account the following when considering group versus individual disability insurance:

Limitation of group disability policies

Options to customize a group disability policy are limited, and disability policies are usually restricted to one insurer. In addition, group long-term disability insurance policies are generally a percentage of income up to monthly cap. High income earners may also face reverse discrimination as the coverage parameters are generally geared towards covering rank and file employees.

Taxation of benefits

When your employer pays the premiums, disability benefits are considered taxable. The benefits you receive could be considerably less than expected and insufficient for your needs. When you make an additional election, it’s not always clear if the premiums are being paid pre- or post-tax, so it’s important to check before you move ahead.

Dwindling reliance upon “safety nets”

Workers employed as independent contractors can’t necessarily count on workers’ compensation for work-related injuries, and in general, laws governing workers’ compensation coverage requirements vary from state to state. Additionally, workers can’t rely on disability benefits through Social Security. The benefits are minimal and the Social Security Administration’s OASDI definition of disability is much stricter, making it more difficult to qualify for than employer group policies—plus, there is often a backlog for approval.

Why tech workers need individual disability insurance

Due to the nature of their jobs, those in the technology space in particular (though this can apply to other industries) should not rely on employer-provided disability coverage. Although most disabilities are due to chronic conditions or illnesses rather than injury, tech workers have a higher risk of developing certain debilitating injuries or conditions such as musculoskeletal disorders and repetitive motion stress injuries such as carpal tunnel syndrome.

Tech workers often switch jobs or work freelance and would be unprotected without an individual policy. Individual coverage is portable: It goes where you go. Group coverage, on the other hand, is commonly tied to your employer and may not go with you when you leave.   

Tips for purchasing individual disability insurance

Here are several tips to keep in mind when purchasing individual disability insurance.

Tip 1: Define correctly

The most important aspect of disability insurance is the definition of disability, especially for long-term disability insurance. There are two basic definitions:

  1. Own-occupation is the most flexible definition. It pays benefits if you are unable to perform the duties of your occupation even if you find a job in another field—such as a surgeon teaching at a medical school.
  2. Any occupation is the least flexible and the weakest definition of disability. The policy will only pay benefits if you cannot work in any occupation.

Strive for a policy with the strongest definition of disability (own-occupation).

Tip 2: Use common policy riders to strengthen the definition

Criteria to consider when evaluating policy riders include:

  1. Cost: Long-term disability insurance policies typically will cost one to three percent of your annual salary. The healthier you are, the lower your disability insurance costs will be.
  2. When to buy: Purchase disability insurance while you are young and healthy—before you need it. Many policies require medical underwriting. The longer you wait and the older you are, the more the insurance will cost.
  3. Elimination period: This can be between 30 days and two years, but it’s usually three or six months. The shorter the elimination period, the higher the premiums. A six-month elimination period can save you money, but it needs to be balanced against how long you can go without salary. Here’s where having an emergency fund can help bridge the gap.
  4. Benefit period: The shorter the benefit period, the less expensive the policy. The typical benefit period is five years. Recall that the duration of the average long-term disability claim is almost three years. For peace of mind and if you can afford it—especially if you are your family’s sole provider—consider a policy that continues until retirement.
  5. Coverage amount: Typical coverage aims to replace 60 percent of your current salary (pre-tax) to approximate your take-home pay after taxes. For workers with a longer time horizon until retirement, consider a cost-of-living adjustment rider for inflation protection.

Tip 3: Use additional policy riders to ensure benefits and avoid cancellation  

  1. Future increase option rider: This allows you to purchase more coverage or “stack” policies by only showing evidence of increased salary. There is no need to go through the medical underwriting process again. This allows your disability insurance to keep pace as your salary grows.
  2. Non-cancelable policy: The insurer cannot cancel the policy or raise your rate should you switch jobs as long your pay your premiums on time. This feature is crucial for young workers.
  3. Guaranteed renewable policy: This means the insurer cannot cancel the policy as long as premiums are paid on time; however, premiums can go up.
  4. Unemployment waiver of premium rider: This allows you to forgo premium payments during periods of temporary unemployment.
  5. Catastrophic disability benefit rider: This allows you, under certain conditions, to receive an additional benefit on top of the benefit paid by your base policy.
  6. Residual benefit rider: This pays a proportionate benefit if you experience a loss of duties, time and income of at least 20 percent.

Tip 4: Take the time to choose the right insurer and policy

Be sure to look for an insurer that’s financially strong and has a good reputation. Take the time to research this beforehand. Check reviews and ask for referrals from people you trust and respect. Keep in mind their situation may not look exactly like yours, but they can help you get started. Then, look for a policy that covers your profession, specialty or skill and meets your specific needs. It’s better to find a policy that’s customized to you now and can grow with you in the future than to rush into a decision and be sorry later.

Conclusion

We don’t give disability insurance the attention we do other forms of insurance, but we should. It plays an important role in any contingency plan. For many, a sensible approach may be to coordinate the purchase of a long-term disability insurance policy while building an emergency fund. Questions about where to start? Contact us.


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Why everyone should consider individual disability insurance

by Badgley Phelps | May 06, 2019

According to the Council for Disability Awareness, “More than one in four of today’s 20-year-olds can expect to be out of work for at least a year because of a disabling condition before they reach normal retirement age.” Don’t think it applies to you? The most common reasons cited for short-term disability claims are incredibly common conditions: pregnancy (25 percent) and musculoskeletal disorders including problems with the back, knees or hips (20 percent). For long-term claims, the most common reasons also include musculoskeletal disorders (29 percent) and pregnancy (9.4 percent), but add cancer (15 percent)—and the average long-term disability claim is 34.6 months.

With that in mind, it’s important to consider individual disability insurance sooner rather than later.     

What is disability insurance?

Disability insurance is important and needs to be a part of any worker’s contingency plan. It is insurance to replace part of your paycheck when you’re unable to work due to sickness or injury. If you have a family that depends on the paycheck you bring home, disability insurance is even more important: View it like life insurance. In this context, group coverage through your employer is insufficient and should be viewed as a complement to, and not a replacement for, individual disability coverage.

Following are the two types of disability insurance. 

  1. Short-term disability insurance: This can cover up to 80 percent of your income for a short period of time, usually three to six months. Its elimination period, or the waiting period after you’ve become disabled and before you start receiving benefits, is short—typically 14 days or less—and it is usually provided by employers.
  2. Long-term disability insurance: This is for longer periods of time including two, five, or 10 years, or until retirement. The elimination period is normally 90 days but can run from 30 days to two years. Long-term disability traditionally covers up to 60 percent of your salary.

Other solutions are available for individuals with unique and high limit risks. Policies can be purchased as standalone coverage or in addition to a traditional policy.

Considerations for high income or high net worth individuals

Workers in any industry should take into account the following when considering group versus individual disability insurance:

Limitation of group disability policies

Options to customize a group disability policy are limited, and disability policies are usually restricted to one insurer. In addition, group long-term disability insurance policies are generally a percentage of income up to monthly cap. High income earners may also face reverse discrimination as the coverage parameters are generally geared towards covering rank and file employees.

Taxation of benefits

When your employer pays the premiums, disability benefits are considered taxable. The benefits you receive could be considerably less than expected and insufficient for your needs. When you make an additional election, it’s not always clear if the premiums are being paid pre- or post-tax, so it’s important to check before you move ahead.

Dwindling reliance upon “safety nets”

Workers employed as independent contractors can’t necessarily count on workers’ compensation for work-related injuries, and in general, laws governing workers’ compensation coverage requirements vary from state to state. Additionally, workers can’t rely on disability benefits through Social Security. The benefits are minimal and the Social Security Administration’s OASDI definition of disability is much stricter, making it more difficult to qualify for than employer group policies—plus, there is often a backlog for approval.

Why tech workers need individual disability insurance

Due to the nature of their jobs, those in the technology space in particular (though this can apply to other industries) should not rely on employer-provided disability coverage. Although most disabilities are due to chronic conditions or illnesses rather than injury, tech workers have a higher risk of developing certain debilitating injuries or conditions such as musculoskeletal disorders and repetitive motion stress injuries such as carpal tunnel syndrome.

Tech workers often switch jobs or work freelance and would be unprotected without an individual policy. Individual coverage is portable: It goes where you go. Group coverage, on the other hand, is commonly tied to your employer and may not go with you when you leave.   

Tips for purchasing individual disability insurance

Here are several tips to keep in mind when purchasing individual disability insurance.

Tip 1: Define correctly

The most important aspect of disability insurance is the definition of disability, especially for long-term disability insurance. There are two basic definitions:

  1. Own-occupation is the most flexible definition. It pays benefits if you are unable to perform the duties of your occupation even if you find a job in another field—such as a surgeon teaching at a medical school.
  2. Any occupation is the least flexible and the weakest definition of disability. The policy will only pay benefits if you cannot work in any occupation.

Strive for a policy with the strongest definition of disability (own-occupation).

Tip 2: Use common policy riders to strengthen the definition

Criteria to consider when evaluating policy riders include:

  1. Cost: Long-term disability insurance policies typically will cost one to three percent of your annual salary. The healthier you are, the lower your disability insurance costs will be.
  2. When to buy: Purchase disability insurance while you are young and healthy—before you need it. Many policies require medical underwriting. The longer you wait and the older you are, the more the insurance will cost.
  3. Elimination period: This can be between 30 days and two years, but it’s usually three or six months. The shorter the elimination period, the higher the premiums. A six-month elimination period can save you money, but it needs to be balanced against how long you can go without salary. Here’s where having an emergency fund can help bridge the gap.
  4. Benefit period: The shorter the benefit period, the less expensive the policy. The typical benefit period is five years. Recall that the duration of the average long-term disability claim is almost three years. For peace of mind and if you can afford it—especially if you are your family’s sole provider—consider a policy that continues until retirement.
  5. Coverage amount: Typical coverage aims to replace 60 percent of your current salary (pre-tax) to approximate your take-home pay after taxes. For workers with a longer time horizon until retirement, consider a cost-of-living adjustment rider for inflation protection.

Tip 3: Use additional policy riders to ensure benefits and avoid cancellation  

  1. Future increase option rider: This allows you to purchase more coverage or “stack” policies by only showing evidence of increased salary. There is no need to go through the medical underwriting process again. This allows your disability insurance to keep pace as your salary grows.
  2. Non-cancelable policy: The insurer cannot cancel the policy or raise your rate should you switch jobs as long your pay your premiums on time. This feature is crucial for young workers.
  3. Guaranteed renewable policy: This means the insurer cannot cancel the policy as long as premiums are paid on time; however, premiums can go up.
  4. Unemployment waiver of premium rider: This allows you to forgo premium payments during periods of temporary unemployment.
  5. Catastrophic disability benefit rider: This allows you, under certain conditions, to receive an additional benefit on top of the benefit paid by your base policy.
  6. Residual benefit rider: This pays a proportionate benefit if you experience a loss of duties, time and income of at least 20 percent.

Tip 4: Take the time to choose the right insurer and policy

Be sure to look for an insurer that’s financially strong and has a good reputation. Take the time to research this beforehand. Check reviews and ask for referrals from people you trust and respect. Keep in mind their situation may not look exactly like yours, but they can help you get started. Then, look for a policy that covers your profession, specialty or skill and meets your specific needs. It’s better to find a policy that’s customized to you now and can grow with you in the future than to rush into a decision and be sorry later.

Conclusion

We don’t give disability insurance the attention we do other forms of insurance, but we should. It plays an important role in any contingency plan. For many, a sensible approach may be to coordinate the purchase of a long-term disability insurance policy while building an emergency fund. Questions about where to start? Contact us.


DisabilityInsurance_CTA

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