You are not the only one who underestimates your disability risk. According to a Council for Disability Awareness study, only 10% of people accurately estimate their disability chance. TMA Insurance trust has some shocking statistics.
- One in eight workers will become disabled for at least five years during their working lives.
- Average long-term disability claims for group members last 34.6 months.
- 90% of disabilities are due to illness and not accidents.
Short-term (“ST”) disability insurance policies provide coverage for six months or less. It is usually better to have cash reserves than to pay a premium for a short-term disability insurance policy. It is, however, much harder to accumulate enough cash reserves to cover a long-term disability. Long-term (“LT”) disability insurance has become a necessity.
Women pay more for individual LT Disability policies than men, particularly if they are in their childbearing years. This is because there is a greater chance of them becoming disabled. The opposite is true for life insurance: Premiums on life insurance are usually more expensive for men than women to reflect a shorter life expectancy.
Important distinctions regarding Disability Definitions
Your ability to receive benefits will be affected by how a policy defines “disability”. The two main categories of coverage are “any occupation” and “own occupation”.
- If you are unable to perform the duties of your occupation, “Own occupation” policies provide disability benefits. If you are a lawyer and your disability prevents you from being a lawyer, you will be able to receive benefits, even if your health allows you to choose another job.
- The “Any occupation” policies are more restrictive. These policies pay benefits only if you can’t work in any “gainful occupation”. For example, if an accountant is unable to work, you could lose your benefits.
Keep in mind, however, that not all occupation policies are created equally.
- Your disability benefit will not be affected by the salary you earn while you are disabled under “true occupation” policies.
- “Transitional own occupation” insurance policies will pay lower benefits based on the salary you earn if you choose to work while you are disabled. If your disability coverage is $7,000 per month and you are earning $5,000 per month during your disability, then your monthly disability benefits will be reduced by $2,000 under a transitional owner-occupation policy.
- Modified occupation coverage does not allow you to receive disability benefits if your disability is temporary. While you can still get benefits, you cannot receive them if you take on a job.
Three Main Groups of People: Which Type are You?
Let’s now look at disability insurance policies for three distinct categories: self-employed individuals, those who are not covered by an employer and those who stay at home parents.
If you are able to remain in this group, consider yourself lucky. Large employers often offer long- and short-term disability insurance at no cost to employees. Employer-provided LT Disability policies typically offer benefits between 50% and 60% of your pay. Terms can vary. You will be taxed on any income received when you collect disability benefits even if you don’t pay a premium for the policy.
It has been my observation that employees in government have different benefits than employees in large corporations. Government workers are not eligible for short-term disability. Sick pay must be exhausted first. The level of LT disability benefits is dependent on the length of the disability. The coverage for the first year of disability is 60%. However, years two and three offer only 40%. This is why I recommend that government employees have a supplemental policy.
You can shop around to get a supplemental LT Disability policy if you are not satisfied with the coverage offered by your employer. Your current coverage would be taken into consideration by the insurance carrier to ensure that you don’t make more (after-tax), as a disabled person.
A broker who specializes on disability insurance will be able to help you find long-term coverage. The policies and carriers are very different. Therefore, it is important to get a good understanding from your broker about the details of your policy (also known as riders). Automatic benefit increases can be helpful, but they are more expensive each year.
This group is at risk of not receiving adequate disability coverage, or having no coverage at all. Since 2014, I’ve been working for myself and have had the opportunity to purchase disability insurance through two professional companies. Aon offers both life and disability insurance policies to its members. Members can choose between a 13-week and 26-week waiting period within the group policy. The premiums that you pay for extended waiting periods are lower. Members can also choose to be covered for partial disabilities. This policy is more costly because it doesn’t require someone to be out of work completely when they become disabled. It also falls under the true definition of disability: Own-occupation.
What happens if your profession does not offer group insurance? Although you can purchase an individual LT Disability policy, these policies are often very expensive and may cost as much as 3% of your income. You can limit the coverage’s duration. You can delay the benefit start date or limit the duration to reduce costs. If the 13-week waiting time with lifetime benefits is too costly, you might consider a policy that has a 26-week waiting window and up to five year of benefits. This strategy is not for everyone. You will need sufficient financial resources to cover the first six months of your disability, as well as any additional five-year-long disability.
3. Parents who stay at home
To be eligible for disability coverage, you will need to have income. Parents who stay at home aren’t paid for their contributions to the household don’t usually qualify for disability coverage. Instead, focus on maximising the income earner’s coverage for disability insurance.
Planning is a process
Comprehensive financial planners such as me can discuss disability insurance with clients. Fee-only fiduciary advisors swear to protect their clients’ best interests and receive no compensation for the advice they provide. A NAPFA advisor is recommended if you have concerns about your insurance coverage or want to get an impartial opinion.