Q: In the event of disability, do you have insurance
to cover the loss of income?
A: Maybe. Possibly. At least in some circumstances…or maybe not.
Q: Is your disability insurance coverage good enough?
A: Maybe. Possibly. At least in some circumstances…or maybe not.
An incident of disability, i.e., an illness or accident that keeps you from working, is a big deal in a personal household economy. And the odds of having a period of disability are rather high. The Social Security Administration states, “Studies show that a 20-year-old worker has a 3-in-10 chance of becoming disabled before reaching retirement age.”
An incident of disability is not only more likely to occur than death, but in some ways may be more devastating to household finances. A premature death deprives the family unit of income, while a disability not only disrupts income, but also introduces the financial burden of ongoing care for the disabled individual.
Because disability can be so disruptive, several forms of automatic, universal income protection have developed in the past century to protect workers from financial ruin. But the amount of coverage these programs provide can be spotty and vary greatly with individual circumstance. The following is a short list of federal, state and employer-sponsored resources that might provide disability benefits.
Workers’ Compensation
In the United States, most employees who are injured on the job can receive compensation for their injuries through state-sponsored Workers’ Compensation programs. These programs, which were first established in the early part of the 20th century, cover medical costs incurred, as well as monetary compensation for a loss of earnings, as a result of a workplace injury. Benefit payments may be received as monthly income or lump-sum settlements.
The definitions of disability and the terms of compensation will vary from state to state, but all Workers’ Compensation programs share one important feature: the coverage applies only to work-related accidents or illnesses.
Social Security Disability Insurance (SSDI)
If you have worked long enough and paid Social Security taxes, you may be eligible for monthly benefits from Social Security Disability Insurance, and these benefits may continue until you reach full retirement age and begin receiving Social Security retirement benefits. Unlike Workers’ Compensation, SSDI benefits are payable for any disability, no matter what type or where it occurred.
However, the standards for eligibility to receive Social Security disability benefits are quite rigorous. For the Social Security Administration, total disability means you are “so severely impaired, physically or mentally, that you cannot perform any substantial, gainful work. The impairment must be expected to last at least one year or result in death.” (SSA Publication 05-10029, August 2010)
Applying for and receiving Social Security disability benefits can be a long trek through a bureaucratic maze. Currently, a majority of individuals who apply for SSDI benefits are declined, initially, and receiving benefits may ultimately require a hearing before a judge. Many people find they must retain legal counsel in order to properly navigate this process.
Automobile Insurance Disability Coverage
Some automobile insurance policies may include Death and Disability coverage. These provisions pay benefits if an insured dies or becomes disabled as a result of an auto accident. The benefits vary depending on the nature of the accident and the injuries sustained, but typically include reimbursement for medical expenses as well as some compensation for lost wages. But any compensation is strictly limited to disability that comes as a result of an auto accident.
Group and Individual Disability Insurance
Group and individual disability insurance policies are contracts with insurance companies that provide specific and customized protection in the event of disability. These policies cover disability wherever it occurs, for almost any reason (there may be some exclusions, such as drug abuse). The benefits may be limited to a specific time period – such as five years, or until age 65—or continue for the insured’s lifetime. To protect against inflation, benefits may also increase at regular intervals.
The definition of disability in these programs is typically much more liberal than the definition used by the SSA. An “own-occupation” definition of disability means you are considered disabled if you are unable to perform the duties of your insured activity – even though you may be capable of performing other “substantial gainful work” (the SSDI definition). The definition may also permit benefits to be paid for partial disability, i.e., you are working, but not on a full-time basis.
Group and individual disability insurance policies share many common features, but also differ in several key areas. Among the differences…
Portability. Coverage under most group policies is connected to employment. If you terminate employment, the coverage usually terminates as well. An individually-owned disability policy can “travel” with you, and continue to be in force even if your employer or location changes.
Cancelability. If the group plan isn’t profitable, or the perceived risks of loss are too high, group disability insurance policies can be terminated by the insurance company. In contrast, individually-owned disability insurance is usually issued on a non-cancellable basis; as long as the insured pays the premium, the company must honor the terms of the contract.
Guaranteed Premiums. Under the terms of a group insurance policy, the insurance company has the option of raising premiums as a condition of continuing to offer the coverage. This means the fixed benefit in a group policy may become increasingly expensive. Individual contracts typically feature fixed premiums that remain the same for the life of the contract.
Benefit Caps. Group disability coverage typically expresses benefits as a percentage of current wages (such as 60% or 70%), along with a specified maximum limit, such as $5,000/mo. This figure may or may not include an earner’s commissions or bonuses. Individual disability policies usually define benefits as a fixed number, determined at the time of issue, with options for future increases. For highly-compensated employees, the caps present in group policies can result in “reverse discrimination” in that their benefits are proportionally less than lower-compensated employees.
Underwriting and Pricing. Because they offer more features and guarantees, individual policies are usually subject to greater scrutiny before they are issued. Applicants may have to provide financial documentation as well as medical history, and submit to an individual exam. On the whole, individual disability coverage will have higher initial premiums, although the comparative costs may change over time since the individual policy premiums will stay the same while group premiums may increase.
Prime Candidates for Individual Disability Insurance
Self-employed individuals, highly-compensated professionals and those whose careers lead them to change employers frequently are likely to find individual disability insurance a good fit. The portability of the benefit, along with the certainties of price and coverage are effective long-term solutions for those who are heavily invested in their businesses, professions or careers.
Q: Is your disability insurance coverage good enough?
A: Why not review your coverage with a disability expert and find out! Your ability to earn an income is too valuable an asset to leave unprotected.
Elozor Preil is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached at [email protected] See www.wagroupllc.com/epreil for full disclosures and disclaimers. Guardian, its subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.
By Elozor M. Preil
