Disability insurance is one type of insurance that is often ignored by most individuals unless it is provided by their employer. The reason is that it can be expensive to purchase, and many people opt for the optional term life insurance, thinking this is a wiser choice for their optional benefit dollars.
Having adequate life insurance to provide for one’s family is always important, but providing for your family in the event of a disability is equally important and more likely to occur than a premature death.
Disabilities can be caused by accidents (work or non-work related) or the onset of illnesses or diseases (people may even qualify for coverage in the event of knee or hip replacement). Many employers offer short-term disability insurance as part of their basic benefit program. This coverage will usually last for the first six weeks following a claim. This coverage normally provides for as much as 100 percent of the income the employee normally earns in the base salary.
Long-term disability insurance, if provided through an employer-sponsored program, will then pick up after six weeks and continue for the shorter of the term of the disability or up to age 65. Policies can vary, and it is common for individual disability coverage to be purchased for a time period of two to five years.
Limiting coverage to a smaller time period can significantly reduce the premiums. In addition, with individual policies, you have to decide on an elimination period, which is the amount of time you have to wait after the disability is reported to the insurance company before you begin collecting benefits. The longer the elimination period, the lower the potential premium. Elimination periods usually begin at 30 days and can extend up to 180 days.
Long-term disability coverage will not cover 100 percent of your income. Most policies will provide for up to 66 percent of covered income – once again usually just base salary. So, if you are in a job where you earn a lot of your income from overtime, this income is not covered for disability purposes.
If you suffer a disability severe enough, you may also qualify for Social Security Disability. The requirements for SSD are usually more stringent than the requirements of disability insurance offered by private insurers. The amount of the potential benefit is contingent upon meeting the minimum requirements, which includes fulfilling the 40-quarter requirement (the same requirement needed for Social Security retirement benefits).
Finally, if your profession requires very specific skills that you can no longer perform if you suffer a disability, but you may be able to work in some other capacity, you can still receive disability income from the policy if you stipulate this as a requirement. This kind of provision is common for different types of physicians and other specialized professionals.
Hopefully I impressed upon you the need to evaluate your current benefits to see if you have disability coverage, and if you do not, to purchase a policy. While the potential premiums will seem expensive, the lack of such coverage could be financially devastating on a family.
Jim Heisler is a Certified Financial Planner with Family Wealth Services in Holmesburg. You can read all his Financial Perspective columns here.
Registered Representative, Securities offered through Cambridge Investment Research, Inc., A Broker/Dealer, Member FINRA/SIPC and Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. Family Wealth Services, LLC and Cambridge are not affiliated.
Jim Heisler, CFP®, CDFA™, CASL™ Family Wealth Services, LLC is located at 8275 Frankford Ave. (215-332-4968)