One of the most often over-looked types of risk management is disability insurance. According to the Council for Disability Awareness, over 1 in 4 of today’s 20-year-olds will become disabled before they retire1.The odds are staggering, yet many people fail to consider how their families would be impacted if they became disabled.
The good news is that Social Security has a disability component. The bad news is that Social Security’s definition of disability is extremely stringent. One must have a condition that is expected to last at least 12 months or end in death and be severe enough to keep a person from doing any substantial gainful activity. In addition, there is a 5-month waiting period and the Social Security Administration has denied 72% of first-time filers2.
Occasionally, employees are offered disability insurance through their job. Policies through work should be reviewed on a regular basis to ensure the benefits are adequate. Employer-provided policies generally cover around 60% of base salary. If an employer is paying the premiums, the benefits will be taxable.
Employer-provided disability coverage may be supplemented with individually-purchased stand-alone coverage. As part of the review process, be sure that the employer-provided coverage benefits coordinate with the stand-along policy. Purchasing an individual disability policy with after-tax dollars will allow you to collect benefits tax-free. Consider the following when purchasing a disability policy:
- How long can I wait after becoming disabled before I need to collect benefits? This waiting period is how long you will be without income. Common waiting periods are 90 or 180 days.
- Pay attention to the definition of disability. Common disability terms are own-occupation and any-occupation. Own-occupation is preferable as it covers your inability to do your previous job, not just any job.
- How long do you want the coverage to last? Common choices of disability terms are two years, five years, and until age 65.
Disability insurance is a solid foundation of risk management planning and can provide a financial life raft at a crucial time. Are you covered?
- Council for Disability Awareness Report: http://www.disabilitycanhappen.org/research/CDA_LTD_Claims_Survey_2012.pdf
- Social Security Department: http://www.ssa.gov/policy/docs/statcomps/di_asr/2010/sect04.html