Disability Insurance

Your ability to earn money is one of the most valuable assets that you have. All of your plans for the future – buying a home, planning for college, saving for retirement - are based on the assumption you will continue to earn a salary until you decide to retire. But what if it were not your decision? What would happen if an unexpected illness or accident left you unable to work?

Expenses often increase due to disability at the same time income is drastically reduced. In the event you’re unable to continue to earn your income because of illness or injury for any period of time, your family’s financial plans could be ruined. That’s when disability insurance becomes important. It enables you to maintain your lifestyle and protect your family’s future if you are unable to work because of illness or injury.

People protect their homes, lives, cars, and even their identities with insurance but often do not think about protecting their income as well. Roughly 3 in 10 Americans will suffer a disability lasting 3 months or longer before the age of 65. Nearly 1 in 4 Americans will become disabled before they retire and the average long-term disability absence lasts over two and a half years. A Harvard study* found that over half of all personal bankruptcies and mortgage foreclosures are due to disability.

What would happen if you were too sick to work? Could you maintain your standard of living? Could you pay your mortgage? Could your family live on just your spouse’s income? If the answer to any of these questions is no, you should consider income protection strategies. A disabling injury or illness could lead to medical bills, modifications to your car or home, or other unforeseen needs that can be quite expensive. Simply put, if you have a job then you likely need disability insurance.

Who benefits from disability insurance?

In the U.S., a disabling injury occurs every second, a fatal injury occurs every four minutes.1

However, disability insurance claims show that fewer than 1 in 10 disability claims result from injuries.

The four most common causes of existing long term disability claims in 2013 were diseases of the musculoskeletal system and connective tissue (28.7% of all existing claims), diseases of the nervous system and sense organs (15.2%), diseases of the circulatory system (12.4%) and cancer (9.1%) - the same top four causes as in the three prior years.2 If you’re working and earning a paycheck, chances are, you need to protect your income. Without the right protection a lot is at stake if you become too sick or hurt to work. At Generational Financial Partners, we focus on helping our clients protect their future income.

Group benefits vs. an individual policy

The main source of disability income protection in the U.S. is coverage provided by employers. Many employers, especially larger ones, provide their employees with group insurance coverage. There are two forms: short-term disability (STD), which generally replaces a significant percentage of your income for about three months, and long-term disability (LTD), which typically pays 40% to 60% of your base salary (pre-tax) for longer periods. Often, employees are given the option to add to the baseline coverage that their employer provides. A benefit of purchasing disability coverage at the workplace is that it’s generally easier to qualify for versus coverage purchased on your own.

An individual disability insurance policy is one that you purchase on your own. A privately owned policy is transferable, meaning you won’t have to worry about losing coverage if you change jobs. Generally, most individual policies pay between 40% and 65% of your pre-disability gross salary. When paid with after-tax dollars, benefits are received income tax free.

How much is enough?

Disability can drain your family’s savings and jeopardize your financial security. If you become disabled, will you be able to maintain your current standard of living? When you’re disabled, you may not only lose your ability to earn a living, you could also lose your savings, your retirement funds, and even your home.

The easiest way to determine how much you need is to add up your monthly living expenses and compare them with the income you could expect from your existing disability coverage, plus any income you can count on from other sources (i.e. social security, personal savings). If your total income from all sources will not be enough to support you and your family, you should consider buying additional disability insurance—either through work or on your own—to make up the difference.

Specializing in disability insurance for professionals

Generational Financial Partners offers disability insurance policies to a wide range of professionals including physicians, attorneys, consultants, business owners and executives. Thousands of professionals rely on Generational Financial Partners for the coverage they need to protect their income. We understand your unique situation, needs and complexities. Our knowledge and experience will help you get the best disability insurance policy to give you the peace of mind that comes from having protection so you know you can handle whatever comes your way – even if you can’t work for months at a time.

National Safety Council, Injury Facts®
2 2014 CDA Long Term Disability Claims Review


Group vs. Individual Disability Insurance

Your employer, particularly if you work for a large company, may provide short- and/or long-term group disability coverage at no cost to you. One of the best features of employer-provided coverage is that there is no underwriting, meaning you automatically qualify for coverage. Group benefits typically cover about 60% of your gross income to a maximum level amount (for example $10,000/month). If your employer is paying the premiums, the benefits are taxable and if you have group coverage and you leave your job, you generally are not able to take the coverage with you.

Is your group disability insurance enough?

The easiest way to determine if your group disability coverage is enough, is to add up your monthly living expenses and compare them with the income you could expect from your existing disability coverage, plus any income you can count on from other sources (i.e. social security, personal savings). If your total income from all sources will not be enough to support you and your family, you should consider buying an individual disability policy to supplement your benefits.

Individual disability insurance

If your employer does not provide group disability insurance coverage, a good alternative is an individual disability insurance policy you purchase on your own through a qualified insurance professional. You never need to worry about losing coverage if you change jobs. An individual policy also gives you the opportunity to consider policies from a multitude of carriers. If you buy through work, you’re usually limited to buying (or increasing) coverage from the carrier with which your employer is contracted. What’s most important is the peace of mind that you’ll have the means to make ends meet in the event you suffer an unexpected injury or illness, and are unable to work and earn an income. Long term disability insurance, provided by an employer, may be inadequate to meet a disabled employee's needs. This is another reason why employees might want to consider purchasing supplemental long-term disability insurance.

INDIVIDUAL DISABILITY INSURANCE POLICY PROVISIONS AND BENEFITS

Provide evidence of good health

An insurance carrier can decide whether or not to insure you. As a result, the carrier can be particular with who they offer coverage to. This, however, enables the company to be more liberal with policy provisions, providing you with better policy definitions.

Portable policy

With individual disability insurance, you own it and it’s fully portable. This means it moves with you even if you change employers.

Non-cancelable

The provider cannot change your premiums or cancel your coverage as long as you pay your premiums on time. Additionally, if you purchase your policy at a younger age, you'll be able to lock in a lower premium.

Tax-free benefits

If you purchase disability insurance with after-tax dollars, your benefits will usually be income tax free.

Protects your insurability

If you experience an adverse change in health, you can increase your individual / supplemental policy in the future without worrying about losing group benefits if you leave your employer.

Group disability insurance

Group disability insurance helps attract and retain quality employees and is tax deductible to the business. Coverage is available for both short- and long-term disabilities and often without medical evidence of insurability. Group disability plans tend to have benefit periods to age 65, and typically provide the totally disabled employee a percentage of their salary up to a specified maximum/month.

Short-term group disability insurance (STD)

Short-term group insurance provides benefits for employees who are totally or partially disabled by a covered injury, illness, or pregnancy. It provides benefits for a short period of time, typically three to six months.

Long-term group disability insurance (LTD)

Group disability coverage provided by an employer for employees, typically pays 50% to 60% of your base income (pre-tax) for longer periods if you become disabled. LTD coverage usually begins where the short term insurance policy leaves off.

Drawbacks to a group disability insurance policy

  • Most group policies require you to be totally disabled to receive benefits
  • Benefits are not portable if you leave your employer
  • Benefits can be cancelled by your employer
  • If your employer is paying the premiums, the benefits are taxable to you, diminishing the amount of benefit you take home
  • Benefit amounts are capped, reducing the replacement ratio for higher incomes

How do you decide if you need short-term or long-term disability?

The best way to assess is to look at your financial situation and determine how long you could survive without your income. Long-term illnesses and injuries can devastate your personal finances. You may have enough savings to weather a month’s reprieve from work, but a three-year battle with cancer can drain resources quickly. If you must choose between long- and short-term disability insurance, you’d be smart to adopt a long-term disability policy, which offers significantly greater financial protection. Ideally, the best choice for most consumers is a combination of both.

Professional association insurance

Many professional associations offer members the opportunity to purchase disability insurance through a group plan. Typically, little underwriting is involved and premiums are based primarily on your age and income. Association insurance is similar to group insurance, but typically has a less favorable definition of disability, and has limited benefit amounts. If your need for coverage is great and your budget is limited, this is an option you’ll want to explore.

However, there are drawbacks. If you change professions, the coverage may not follow you and there’s always the chance your professional organization could decide to drop its disability coverage. That can’t happen with most types of privately purchased disability insurance, which are guaranteed renewable as long as you pay the premiums. It is important to consider supplementing your group policy with an individual policy. This will provide you with coverage that is portable, more specific to your occupation, and will increase your overall benefit.