I recently had the pleasure of meeting “Tina” (name changed), a high-profile partner in a highly regarded law firm. Tina assumed she was prepared to financially handle a disability because her firm provided a group disability insurance benefit. However, once we reviewed the benefits booklet, we discovered it only covered 60% of income to a maximum of $10,000/month of income. Further, it only covered base wages – no bonus. Because her typical annual income of base + bonus runs $400,000 – $500,000/year, this obviously left her significantly underinsured in the event of a disability.
Group disability coverage is a great benefit – for the “troops.” It was never designed for the “commanding officers.” There are a number of severe limitations in group disability contracts that can affect Tina’s ability to make ends meet if she should ever become disabled.
Providing an income stream that protects you and your family – plus money to pay back student loans – and even funding your retirement program in the event of a long-term disability . . . “Imagine That™!“
Why Would I Need Individual Disability Insurance?
Many people are, frankly, ignorant of the probability of suffering a disability during their working career. Here are some startling statistics
- The Social Security Administration estimates more than 25% of today’s 20-year-olds will suffer some form of income-interrupting disability before they reach age 67
- In 2019, Social Security paid an average monthly disability benefit of $1,234 to all disabled workers – barely enough to keep a person above the 2018 poverty level ($12,140 annually)
- A July 20, 2019 CNBC article reported that 40% of Americans would have trouble coming up with $400 to pay for an emergency bill
- According to the Council for Disability Awareness, the average length of a long-term disability claim is nearly three years (34.6 months)
- Is it any wonder, then, that 48% of mortgage foreclosures are reported to be from a disability to one of the homeowners?
Not to get nosy but . . . how about you? How much income can you count on – for sure – in the event of a disability lasting nearly three years? Would there be enough, or would you have to rely upon RFC? Relatives, friends, or charity to get by?
Limitations of Group Disability Coverage
Many large employers offer their full-time employees group disability coverage to help provide income in the event of a disability. The group disability coverage usually provides short- and long-term disability coverage as a benefit. Certainly, having something in place is better than nothing, but there are significant drawbacks to be aware of with group disability coverage. Here are some:
- Tied to Job—It is tied to your current job. If you change or lose your job, the group disability coverage ends. With an individual disability insurance contract, you can leave your employer at any time and still have coverage. As well, with an individual insurance contract, you do not have to worry about your employer going out of business during the current COVID-19 situation (or in the future) or terminating group disability benefits
- Total Disability Requirement—Most disability polices require the employee to be totally disabled to receive benefits. Individual disability contracts, however, have more flexibility and can even add optional benefits. A “residual disability benefit rider” provides income for an illness or injury for a partial disability. That is, a sickness or injury which does not cause a total disability, but limits your ability to work and results in decreased income
- Definition of Disability is Narrow—Most group disability contracts only give a two-year “own occupation” definition of disability. After that, the contract language changes to define a disability as the “inability to perform ANY occupation.” In an individual disability contract, however, the definition of disability for a “white-collar” worker can remain as the inability to perform the “important and material duties” of their own occupation. For certain areas of medical practice or law, there can even be areas of “subspecialty” and not merely as a physician or attorney. With this “own occupation” definition, benefits may be paid for the entire duration of the disability and length of the contract benefit period (even to age 67 or longer)
- Tied to Base Salary—Group disability coverage is usually tied to your base salary. What if you receive commissions? What if you are a partner or high-income employee who earns a significant amount of compensation through bonuses? These sources of compensation will not be considered as only your base salary is used to calculate the amount of your group disability benefits. Individual disability coverage can fill the gap because it can more broadly define how the compensation sources are tallied. This does require that the income be consistent and not a “one off” occurrence. It can also take into consideration income being deferred into a 401(k) or other retirement plan in the calculation of total insurable income
- Benefits are Limited to 50-60% Base Salary—Group long-term disability benefits are usually limited to 50%, 60% or 66 2/3% of base salary and often set a maximum monthly benefit (e.g., $10,000/month), regardless of your annual pay. If no group coverage is available or you want to protect even more than 50-60% of your earnings, you can purchase an individual disability contract to supplement the group plan. With supplemental individual insurance contracts, it is possible to replace 80% and sometimes even 100% of your income (including commissions and bonuses)
- Duration of the Benefits is Less—Since the definition of disability normally changes after two years of the claim, most group disability contracts end after 24 months of benefits. Individual disability insurance contracts, on the other hand, can pay out to age 67 in the event of sickness or injury with an “own occupation” contract, and for a lifetime in the event of the permanent loss of:
- use of both hands, both feet, or one hand and one foot
- hearing in both ears
- sight in both eyes
- Benefits are Taxable—If your employer is paying the premiums on the group disability coverage, the benefits will be taxable to you. Individual disability insurance benefits are typically tax-free, although it can be paid pre-tax. In that case, the insurance company will allow an insured to purchase a greater amount of coverage to offset taxation of the benefits
- Offsets—Group long-term disability payments are generally reduced (the technical word is “offset”) by payments received from workers’ compensation, State disability income, pension benefits (not 401(k)) and Social Security disability payments. Individual disability contracts are not affected by any of these offsets, or by any group disability benefits you might receive during your disability
- Premiums Generally Increase—If you are personally paying all or some of your group disability insurance, you have no doubt observed that the premiums usually increase annually or when the business renews the insurance. A private disability contract has a monthly premium that in most cases remains the same
- Does Not Cover Partial Disability—Most group disability contracts do not pay for a partial disability. A private disability contract can pay a percentage of the total benefit which represents the percentage of income lost. For example, if a person loses 60% of their income due to a disability, they will receive 60% of the individual contract’s total monthly benefit amount. The best contract language does not require a total disability before paying a partial benefit
- No Additional Perks—Group disability benefits have no additional add-on perks. Because individual disability contracts are customized, they can offer higher monthly benefit limits and future purchase options. Individual disability contracts can also offer attractive riders, such as a “cost of living rider” (which adjusts the monthly benefit to keep up with inflation), “benefit increase rider” (which provides the opportunity to purchase additional coverage without having to prove medical insurability), and “return to work rider” (which provides benefits even after returning to work if you have an income loss of at least 20% from the previous income level)
Conclusion: If You Are A Professional, Executive or Business Owner, You Should Acquire Personal Disability Insurance — Even If You Have Group Disability Insurance!
Are you in the same situation as Tina? Do you have group insurance from work but no individual disability insurance protection? After reading the above information, I hope you can now answer the question “why would I need individual disability insurance?”
Let’s have a call or coffee to discuss your situation if you do not have individual disability coverage. How can we protect your income stream and financial commitments? They don’t give this type of coverage away for free, but it is seldom where I have not found an affordable solution even when things are tight at the end of the month! We will help you gain a clearer picture of your areas of risk balance for group and individual contracts to fit the budget – and give you freedom from worry about “what if this were to happen?”
Owning individual disability insurance will provide you with peace of mind. You will know that if you should become sick or hurt and unable to generate income from your specific occupation, you will be able to guarantee your future for yourself and your loved ones . . .
Written by R. J. Kelly – June 2020