Long-term disability insurance is something most people don’t think about often, especially those who are in their prime earning years and in relatively good health.
However, accidents and illness do not discriminate. Thousands of people each year are unable to work due to an unexpected incident, whether recovering from major surgery or experiencing debilitating effects of a developing disease. In fact, the U.S. Social Security Administration reports that more than 25% of people currently in their twenties will experience a debilitating illness or injury before their typical retirement age.
Being proactive about personal and household finances has always been wise; however, the global COVID-19 pandemic is perhaps a stark reminder to always be prepared for the unexpected. With that in mind, consider taking a closer look at your disability insurance options. Not only does this benefit offer income protection, but it can also play into your overall financial planning strategy.
Disability Insurance: What You Need to Know
Disability insurance replaces a percentage of your income should you become unable to work because of an injury or prolonged illness. Many organizations offer short- and long-term disability plans as part of an employee benefits package.
Common Causes of Long-Term Disability Claims
If you have healthy savings, short-term disability claims (such as pregnancy or a broken limb) might not affect your long-term financial health. However, longer-term claims could significantly impact your overall wealth management planning.
According to the Council for Disability Awareness, the most common causes of long-term disability in 2020 included:
- Musculoskeletal disorders (27.6%)
- Cancer (15%)
- Injury, such as fractures and sprains (12%)
- Mental health, such as depression (9.3%)
- Circulatory issues, such as heart attack or stroke (8.2%)
Disability Defined: Own Occupation vs. Any Occupation
One important distinction among disability insurance policies is how a disability is defined. Providers will typically offer either “own occupation” or “any occupation” coverage:
Any-Occupation: provides coverage for when someone is unable to work in a job suitable for their education, experience, and age. This means that if the insured person could find work elsewhere, even at a lower wage, the policy would not pay benefits. Typically, any-occupation policies cost less and, as such, are often the norm in group disability insurance plans.
Own-Occupation: provides coverage for the insured person’s specific occupation at the time of the claim; this means that if the person is unable to perform the duties of that position, their benefit claim would most likely be approved. Further, the person could still receive the long-term disability benefit even after finding employment in a completely different occupation.
Disability insurance can be a critical benefit, especially for a household’s primary earner. However, typical group DI policies have limitations that could adversely impact high-income earners. Understanding the nuances of policies and plans is key.
Disability Insurance Considerations for High-Income Earners
Many people have employer-provided group disability insurance and don’t think twice about it, explains Chris Rice, an executive benefits and financial services consultant at York, PA-based McConkey Insurance & Benefits. However, it’s wise to dig deeper into your policy to find out exactly what’s covered, especially for high-income earners.
“It’s really important to understand how [your group plan] works and what you would be getting if you were to go out on claim,” says Rice.
Group disability insurance often has a maximum coverage amount, which is a percentage of your income—60% is typical. However, it’s important to note that this is based on a salary and does not include commission or bonuses. Also, there’s usually a monthly cap on payments, which means that those with a higher salary would suddenly find themselves compensated at a much lower percentage rate, compared to their salary.
For a hypothetical scenario, say someone earns a base salary of $100,000 per year, with an additional $25,000 in commission. With the DI claim, that person would go from earning $125,000 per year to receiving $60,000 in income replacement. As another example to illustrate the monthly caps, if an executive earns $250,000 per year, but their group DI plan has a monthly cap of $5,000, that person would still tap out at $60,000 on the claim, or only 24 percent of their salary.
Rice suggests, and many experts agree, a mix of employer-paid and individual disability insurance policies to maximize the supplemental income. This is especially important for high-income earners because workplace-provided policies often will not provide enough coverage to maintain the same quality of life.
“If you have sufficient coverage, you won’t miss a beat financially,” Rice explains.
How Disability Insurance Fits Into Your Overall Wealth Strategies
While it might not seem obvious at first, disability insurance can play a significant role in your overall wealth management strategies. For one, Rice explains that if you’re out of work on a disability claim, you might not be able to contribute to your retirement or savings plans in the same way. You also might not have access to other group benefits, such as health insurance for your dependents.
“All of these fringe things you take for granted… often you don’t realize what you don’t have until it’s not there,” Rice says.
Loss of income is one thing; but a disability claim can also come along with a temporary loss of your sense of responsibility.
“Someone else, a spouse or partner, might need to step up [to replace income], while they’re also taking care of you. That’s double the burden,” Rice explains of the potential emotional toll of being out on a disability claim.
Perhaps where disability insurance fits with wealth management the most is in mitigating risk: being aware of and carefully planning for potential income gaps is critical to your overall financial wellbeing.
For instance, you might need to dip into savings to cover everyday living expenses (as well as to pay for new costs, like additional care) while out on claim. The alternative is to decrease your current standard of living, which might not be ideal either. Rice explains that having sufficient DI coverage can serve as asset protection, meaning you won’t have to take from savings or borrow from retirement to cover the lost income.
For these reasons and more, it might be worth it to have a conversation about disability insurance with your financial planner.
Taking the Next Step: Finding the Right Disability Insurance Policy for You
As Rice said, it’s important to understand your workplace-provided disability insurance policy. He suggests asking human resources for more specifics; rather than ask about percentages, for example, you could ask, “How appropriately is my income protected? How much of my income is really replaced with this plan?”
Other important considerations include:
- Own-occupation vs. all-occupation policy
- Percentage of income replaced
- Cap on annual benefits
- Maximum length of benefit period
- Taxes – Properly structured benefits can be tax free
If you’re a high-income earner, chances are you will want to supplement an employer-provided disability insurance policy. You have several options:
Add additional DI coverage through group plan: you might be able to elect additional/voluntary coverage, such as cost of living benefits, through your group plan (at an additional premium).
Purchase your own policy: you can go to market and find a self-pay DI plan that fits your needs, budget, and long-term goals. It’s important to note that individual policies need to go through the underwriting process—that is, your premium will depend on your health.
Ask about executive disability carve-outs: some employers participate in group disability insurance programs that have multiple layers of coverage. Executive disability carve-out offers a “guaranteed issue benefit” for high-income earners that are otherwise capped out of income replacement.
If you’re a business owner or are self-employed, you can also look into a range of disability and income replacement insurance options through companies that specialize in business insurance.
None of us want to think about unexpectedly finding ourselves out of work for an extended period of time, especially during years we know we are supporting our family and earning for our futures. This also means none of us really wants to think about disability insurance. However, fully understanding how injury or illness could affect your income (and livelihood) in the short- and long-term can help you make better proactive decisions for you and your family.
“‘Disability’ is the name of the insurance, but it’s more than that. You can look at it as paycheck protection,” says Rice.
Domani Wealth can help you protect the legacy you’re building and help you reach your financial goals. Contact us for a no-obligation consultation today.