When meeting with prospective clients about putting together a comprehensive financial plan, one of the biggest items missing is disability insurance. Did you know that 1 in 3 people between the ages of 35-65 will face a disability and be unable to work for 90 days or longer? And the average length of a disability is 4 years! With all the financial products and salesman in the world these days, it can seem overwhelming and hard to know what you really need versus what someone is just trying to sell you. As with any insurance product, there are definitely policy types to avoid, but it’s also important to make sure you’re properly covered since an injury can be financially devastating and take years to recover from.
Each income-earning spouse needs to have disability insurance in the event they become disabled and aren’t able to earn a paycheck. The insurance will cover most or all of your lost wages if you become disabled. Some employers will offer this insurance to their employees, so you will want to check to see if it is an option for you. If not, you’ll need to buy an individual policy through an insurance agent.
You may be eligible for disability benefits under Social Security, but you have to have a disability that has (or is expected to) keep you out of work for at least 12 months. The government’s definition of disability is the strictest, and requires that you are unable to work any type of job. Because of this, it’s not a good idea to rely solely on Social Security for your disability insurance. In addition, you may want to read this Wall St. Journal article by Michael J. Boskin (originally posted on WSJ.com): The 2016 Disability Insurance Time Bomb
The first question you should ask yourself is how much coverage do you need? A rule of thumb is to have approximately 60% of your income covered by disability insurance. Why not 100% you ask? Sure, that’d be great; but insurance companies don’t offer 100% coverage because then there is no incentive for you to heal-up and get back to work if you’re able to just sit in front of the TV while making your income.
The next question is where do you purchase the insurance? Many employers offer disability insurance as part of their group benefits. If your employer offers it, it’s usually best for you to take advantage of it. Group rates are almost always less expensive than an individual policy. However, while a group policy may provide for a good base, you may need to purchase additional individual coverage because the group benefit is considered taxable income, and it’s often a relatively low percentage of your pre-disability earnings.
Once you know how much coverage you need, and whether you need to purchase an individual policy or not, you’ll want to know the policy’s definition of disability. This may sound silly, but there are actually many different definitions used by insurance companies. “Own Occupation” means you will receive benefits if you are unable to work at your specific occupation, even if you are able to work in another. “Your Occupation” or “Modified Own-Occupation” means you will receive benefits if you can’t work at your specific job and are not working at all. “Any Occupation” means you will receive benefits only if you are unable to work at any job. And finally, some insurance policies offer “Limited Own Occupation” for two to five years. If the disability lasts longer than 5 years, the definition then changes to “Any Occupation.”
One final comment is that it is usually a good idea to obtain a policy that is “non-cancellable” to age 65. This means that the insurance company can’t change your policy, and your rates are level until you turn 65. However, some of the more affordable policies are “guaranteed renewable.” The reason they cost less is that the insurance company can raise rates for all policies in a class; but you won’t be singled out for a rate increase. As you can tell, there are a lot of variables to consider when purchasing disability insurance and I have only scratched the surface in this article.
If you would like an analysis of your current disability insurance coverage, please call me to schedule your free consultation – 913.402.6099.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit https://www.chladekwealth.com.