So, your employer provides group disability income (DI) insurance. That’s generous indeed. Before you check this critical coverage off your financial planning to-do list, however, you may want to give your policy a closer look — it may not go far enough to protect your financial interests.
Workplace disability income insurance policies, which are designed to replace a portion of your income if you are unable to work due to a qualifying illness or injury, often fall short in both the amount and type of coverage your household may need, said Larry Singer, a partner and financial professional with New Jersey Life & Casualty in Livingston, New Jersey.
“Group disability income insurance policies have a lot of shortcomings,” he said, noting most adults who rely on their income for living expenses, or have family members who depend on them financially, should consider purchasing a private DI insurance policy to pick up where their employer-sponsored policy leaves off.
The six primary ways an employer-sponsored DI policy may leave your family financially vulnerable include:
Why disability income insurance is important
Disability income insurance, along with life insurance, is a pillar of financial planning. Without DI coverage, your savings during an extended period of illness or injury can dissipate in a hurry.
Few Americans have the savings to support themselves when they’re not producing a paycheck. In fact, nearly 72 percent of individuals in pre-pandemic America reported that they would experience financial hardship if their paychecks were delayed by even a week, according to the latest report from the American Payroll Association.1
And that’s before they factor in the elevated medical costs associated with a disabling diagnosis. The most recent data from the Centers for Disease Control and Prevention reveal that the mean disability-related healthcare expenditure for adults with a disability is roughly $18,000 per year.2 (Related: Surprising disability facts)
Most families recognize the importance of having life insurance to protect their loved ones, but too few appreciate the need for DI insurance coverage to protect their income stream. According to the Social Security Administration, 1 in 4 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 retirement age.3
Type of DI coverage
As you review your workplace DI policy, pay attention to what type of coverage your employer provides—short-term, long-term, or both.
Short-term disability coverage typically pays benefits for a short period of time after a disabling event, often three to six months. (Note that benefits for all DI policies typically kick in only after an initial waiting — or elimination — period.) Many employers provide short-term DI coverage through their group benefits package, and some states offer their own short-term disability program.
The most common reasons for short-term disability claims include pregnancy complications; musculoskeletal disorders affecting the back and spine; knees; hips; shoulders; and other body parts; digestive disorders; mental health issues; and injuries; according to the Council for Disability Awareness.4
By contrast, long-term disability income insurance is intended to replace a portion of your income if your condition prevents you from working past the point when your short-term DI insurance coverage ends. If you qualify based on the terms of your policy, your long-term benefits would potentially provide partial income replacement for years—such as two years, 10 years, to retirement age, or even potentially for life. The longer the benefit period, the more you will pay in premiums.
It’s up to you to research your employee benefits and identify any coverage gaps that may leave your family financially exposed. A financial professional can help.
Portability of DI policy
No matter how generous your workplace DI insurance policy may be, Singer said you may need to consider purchasing a private DI insurance policy, as well.
Why? Many group DI plans are not portable. When you leave your employer, you may lose your coverage at a time when premiums for a new private policy could be cost prohibitive due to increased age or a medical condition.
“Some employer group DI contracts do have a portability clause, but it’s always important to make sure that you have an understanding of what you have,” said Singer. “It’s really just about what happens if you lose your job, get sick, or become injured and there’s no income coming in.”
DI benefit size
Disability income insurance, whether company-paid group plans or private policies purchased independently, are not designed to replace your entire income. Most cover from 40 to 80 percent of the policyowner’s annual pay.
Peter Glassman, a founding partner of Wealth Insight Partners in Bethesda, Maryland, recommends obtaining as much coverage as you can afford, noting that many adults with workplace DI benefits have a “false sense of security.”
“They assume they’re fully covered, when they’re normally only covered up to a monthly maximum,” he said.
For example, if you earn $200,000 per year and your DI plan would replace 60 percent of your salary up to a maximum of $5,000 per month, your benefit would really only replace 30 percent of your income ($5,000 X 12 = $60,000).
To determine whether you have enough DI insurance coverage in place, estimate your monthly living expenses and compare it with any benefit you might receive. Include your housing and utility costs, groceries, insurance premiums, auto payments, and any other debt obligations you may have. Be aware that if you were to stop working suddenly, your expenses may be different. For example, you may no longer have commuting costs and your income tax bill may be lower, but your health care costs could be (much) higher post-diagnosis.
As a rule of thumb, Glassman said most working adults spend anywhere from 65 percent to 75 percent of their monthly income on living expenses. As such, he normally recommends enough DI coverage to replace “upwards of 70 percent of their income.”
The amount of coverage that’s right for you may differ, however. You may need less (or none at all) if your spouse is currently not producing a paycheck or working part time but would be willing to return to work full time if needed to supplement the household income.
American workers who pay Social Security taxes on their earnings and are eligible for benefits may also be able to replace a small portion of their income through the SSDI program if they are unable to work due to a disability. At the beginning of 2019, the most recent year for which data are available, Social Security paid an average monthly disability benefit of about $1,234 to all workers with a disability — barely enough to keep the beneficiary above the poverty level.5
MassMutual’s disability income insurance calculator can help you determine how much coverage may be appropriate for your household.
Some group DI insurance policies also include offset clauses, which could reduce the size of your benefit.
An offset means that, after a claim, the group insurer agrees to provide any benefits for which you are eligible, but only after you apply for any outside sources of income for which you may qualify, including workers’ compensation, Social Security Disability Insurance (SSDI), state disability insurance programs, Veterans Affairs benefits, or sick pay. Your DI benefit would then be offset by any income you receive.
“The insurer may require that you apply for and appeal the first denial for workers compensation or Social Security and if the insurer deems you did not work hard enough to get that coverage to which you should be entitled, they will offset your coverage by the amount they deem you should have gotten,” said Singer. “This offset provision is not an issue at all with private DI plans.”
Group DI insurance policies often define “total disability”— the trigger that activates long-term benefits — as the inability to produce any kind of income at all. By that definition, if you can perform any work, including a minimum wage job, you would not be eligible for DI benefits.
Policyowners can potentially customize a private policy to include a more liberal definition of disability. Singer recommends a DI policy that defines “total disability” as the inability to perform the kind of work for which you were trained or educated. (Related: A resource guide for adults with a sudden disability)
As you explore private DI coverage, Singer also suggests seeking out policies that include a generous “partial disability” definition, which may provide benefits even if your illness or injury still permits you to work limited hours in the profession for which you are trained.
“One of our attorneys here developed Parkinson’s disease, and he tried to work through it for more than four years, but his billing hours kept declining,” said Singer. “So, even though he was still working, we were able to demonstrate his income loss, and he was able to get partial disability benefits based on his loss of income.”
A private DI policy can also potentially be crafted to include a shorter elimination period, which would typically come with a higher premium. The elimination period refers to the length of time between when a policyowner is diagnosed with a disability and when they become eligible for benefits. Group DI policies often come with longer elimination periods, such as 90 days.
Be aware, too, that if you pay for your DI premiums at work with pre-tax dollars, any benefit you receive will be subject to taxes. That could result in a far lesser benefit than you expect.
If permitted, you might consider purchasing your group disability income insurance with after-tax dollars, while you consider the need for a separate, private policy.
Workplace disability income insurance is a valuable benefit, but it doesn’t always go the distance. To protect your family’s financial security, you need to review your policy and identify any gaps. It may help to consult a financial professional, who can offer guidance on the amount and type of DI coverage your family may need.
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This article was originally published in May 2020. It has been updated.