An Overview of Personal Disability Insurance

 

As parents, we look to ensure against problems that would hurt us and our families. We’ve talked about how to approach buying term life insurance. Now we move on to disability insurance.

Nobody wants to think about disability insurance. Especially when we are young and healthy, we just don’t see the possibility of getting hurt to the point that we can’t work and take care of our families.

The reality is we are much more likely to get disabled than to die. That’s a big reason why disability insurance is so much more expensive than term life insurance.

From the Social Security Fact Sheet

1.  Just over 1 in 4 of today’s 20 year-olds will become disabled before reaching age 67.

2. 67% of the private sector workforce has no long-term disability insurance.

The other point of disability insurance is that if we ever need to collect it, we don’t have the power to invest it right away. It isn’t a lump sum that starts earning compound interest like life insurance.

 

What is disability insurance?

Disability insurance is a way to protect the income that we depend on to pay debts, finance purchases and take care of our families. You buy personal disability insurance from an agent. It’s best to buy from an agent that has access to all the major companies. He can shop your needs around to get you the best rates. You could even work with a couple of different agents if they don’t have access to all the companies.

Disability insurance is meant to pay the expenses while you can’t work. Long-term disability also provides a way to save for retirement because these policies usually stop payment at age 65.

Typically insurers will only insure you for 60-70% of your income because they don’t want to incentivize you to become disabled. They want you continuing to be a productive member of society and paying those great disability premiums for them.

 

How about Social Security Disability?

Everyone is entitled to disability insurance through the Social Security Administration if you meet the requirements. The social security disability paperwork states that you must meet this strict definition.

Social Security pays benefits to people who can’t work because they have a medical condition that’s expected to last at least one year or result in death.

In order to qualify, you also need to meet the two work tests. You have to have worked within a certain time frame compared to becoming disabled and for a certain amount of time depending on your age. Check out these two tables.

An Overview of Personal Disability Insurance

 

An Overview of Personal Disability Insurance

 

The other aspect of social security disability is when you’re a high income earner, there is no way it’s going to cover your usual standard of living unless you have a very frugal lifestyle. I’ve been paying the maximum amount into social security for the past ten years and as I log onto the social security website to find my estimated payout it gives me a value of $2567 a month if I become disabled tomorrow.

An Overview of Personal Disability Insurance

That isn’t going to come close to providing the standard of living my family is accustom to at this point in our lives. It also won’t enable me to save for retirement after 65. As long as we have dependent children at home, my wife is eligible for another $2088 but that still isn’t enough to maintain our current lifestyle and financial goals.

We’ve got mad skills

Another important consideration is many high income earners have very specialized skills that can be compromised more easily with a medical illness or injury. Even though a high earner can’t use her specialized skills, it doesn’t necessarily mean she will qualify for social security disability.

Here is an example that hit close to home.

A surgeon in our town was out for a jog and came upon a rattlesnake. The snake struck and bit him directly in the femoral artery. He has the mental fortitude to dial 911 and tell them where he was before he passed out, but ended up in ICU, with a breathing tube for weeks. Along with neurological damage, he also suffered short-term memory loss. He can no longer see patients or perform surgery.

He still works in some capacity and has become a consultant, but under the strict definition of the social security administration, he couldn’t collect a disability benefit because he still has the capability to do some work.

 

Who needs personal disability insurance?

Any high income earner that isn’t financially independent needs some sort of personal disability insurance. If you have debt, especially like student loan debt that isn’t dischargeable in bankruptcy, you need a way to cover those debt payments. Having children and paying for college costs should be factored into the amount of disability insurance you obtain. You’ll still be limited to a fraction of your current income, but much more than any government program can provide.

What should you consider when buying disability insurance?

A disability policy is pretty complicated. There are plenty of stipulations and riders that can be tailored to fit your particular needs. A qualified agent can guide you through these criteria and make the best recommendations to fit your situation.

Some topics to consider are:

  • Presumptive Disability: This means that the policy considers you disabled immediately if you lose the use of both arms, both legs, both eyes, both ears or speech permanently. The understanding is your disability claim is very likely and permanent. The policy starts paying immediately.
  • Non-Cancelable: You want this. You don’t want future premiums to go up or be cancelable when buying a policy.
  • Own Occupation: This means you can still claim disability if you can work, but not do the exact prior job. If you can work in some other capacity, you are still eligible for disability payments.
  • Benefit Period: Most policies pay until age 65 but others will let you extend it if you desire.
  • Residual Disability: This is a provision where the insurance company either pays until you are back to work full time or making full pay. This could come into play if you need to work extra hours to regain clients or build up a business after suffering a loss of income due to disability. Most people want to base disability on income and not only returning to full-time work.
  • Elimination Period: The time between when the disability occurs and when payments start. Commonly 90 days, but you can choose what you want. If you can build up an emergency fund, this could reduce your premiums by selecting a longer elimination period.
  • Recurrence: If you have a disability, recover and then have another disability, with this provision you don’t have to go through a second elimination period.
  • Make Payment with after-tax dollars: If you make the payments with pre-tax dollars, you will have to pay taxes on the disability payments.
  • Exclusions: There are common exclusions such as term limits for psychological disability, those related to drugs and alcohol, acts of war or if you suffered a disability while committing a crime.
An Overview of Personal Disability Insurance

“I think I hurt my back! You think my disability policy will cover it?”

 

How about my employer-sponsored disability plan?

A lot of us have access to employer-sponsored disability plans. They may be great or they may not. Look at the fine print and make sure that the plan covers all the concerns you may have. A lot of the plans only pay for a short period of time. They probably aren’t own occupation.  If you pay the premiums with pre-tax dollars you are responsible for paying taxes on any disability payments. Look at the same topics we covered above when evaluating your employer’s group disability plan.

Wrap Up

This is meant to get you thinking about disability if you haven’t before. It might be a good time to go back and reevaluate your current policy. When was the last time you looked at it? Maybe you’ve become financially independent and don’t need it anymore!

Is there anything else important to you when selecting a disability plan? Have you found a good strategy that works for you? Let me know in the comments.

 

 

 

Tom
Tom is a doctor, husband and father of five with a passion for parenting and finance. When he isn't skateboarding, riding BMX, or jumping on the trampoline with his kids, he is reading and writing about personal finance. He helps high income parents educate and mentor their kids to become financially, emotionally, and intellectually self sufficient.

2 Responses to “An Overview of Personal Disability Insurance

  • I’m really fortunate that I’m to have really good personal disability insurance through work. If it weren’t for work’s great benefits I would definitely have to be shopping on the outside trying to find some insurance 🙂

    Great overview!!!

    • Glad to hear that Rob. I wish I was that fortunate. That is definitely something people should factor in when selection a job. It could be worth thousands in savings.

      Tom @ HIP

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