My Love Letter to My Family and My Employees – Disability Income Insurance Demystified
I had just dropped my daughter and son off at their elementary school and headed over to a Citi Bike stand to get a little exercise, while commuting to work. I had forgotten my helmet, and looking at my watch, I realized that I was going to be late for my 9:00am client meeting, unless I biked. In the pit of my stomach, I knew that I should be late and walk, take the subway, or even try to hail a cab even though none would be available as it was rush hour. Instead, I decided to bike, being extra careful not to veer off the bike path that was closed to traffic. There were only two streets I had to cross. As I was going through the second intersection, a car disregarded the red light and swerved into me. After coming to, my first thought was about my family, and whether I had enough disability insurance. A not-entirely-welcome aha moment.
Like taxes, insurance is something that many of us think about, at least in the abstract, but nobody likes to talk about. However, disability insurance can be financially lifesaving, because this policy will pay benefits when you cannot earn a living due to illness or major injury. Like all insurance, disability income insurance is designed to protect you against financial disaster. Most disability policies pay you a benefit that replaces part of your earned income (usually 50% to 70%) when you can’t work.
I confided the possibility that I could become disabled, before that fateful bike ride, but studies show that your chances of being disabled for longer than three months are much greater than your chances of dying prematurely. One reason for this is that medicine has made many illnesses and injuries treatable that formerly might have killed you. Although this is good news, it also increases your need to protect your income with disability insurance.
There are many shades of disability. If you’ve ever seen an apparently healthy man or woman park in a handicapped spot at the mall, you know that a person can be disabled without using a wheelchair or showing any outward signs of illness. Any disease or injury that is severe enough can cause disability depending on the nature of your job, and the nature of the illness or injury. For insurance purposes, being disabled means having a mental or physical condition that impairs (either permanently or temporarily) your ability to work.
In general, disability insurance can be split into two types: private insurance (individual or group policies offered by your employer, that are purchased from an insurance company) and government insurance (social insurance provided through state or federal governments). I will focus on individual private disability insurance in this article, because government and social security disability payments are never enough, and if you are employed with group insurance coverage through your employer, that, too rarely offers enough coverage. Private disability policies also usually offer more comprehensive benefits to insured individuals.
Do you need to think about disability insurance?
What would happen if you suffered an injury or illness and couldn’t work for days, months, or even years? If you’re single, you may have no other means of support. If you’re married and even if you are able to rely on your spouse for income, you probably also have many financial obligations, such as supporting your children and paying your mortgage. Could your spouse really support both of you? In addition, remember that you don’t have to be working in a hazardous position to need disability insurance. I am the perfect example of a person who works in a very safe job. As a financial planner, the biggest risk I have at work is getting a papercut. However, accidents happen not only on the job, but also at home, and illness can strike anyone. Everyone who works and earns a living should consider purchasing disability income insurance.
Business owners and employers have more risks
If you own a business, disability insurance can protect you in several ways. First, you can purchase an individual disability policy that will protect your own income, which is what I had. Second, you can purchase business-overhead-expense insurance to ensure that if you get sick, your business will stay healthy, which I did not have prior to my accident. I waited sometime after my accident before applying for business-overhead insurance in the hopes that I would be approved now that I was recovered and, unfortunately, I was still denied coverage. The concussion that I sustained was much more serious, because I had experienced a massive traumatic brain injury and stroke when I was in my teens. The insurance company underwriters did not care that I had just completed a half marathon or that I successfully run a successful business and nonprofit without any ramifications from that earlier injury. My amazing insurance agent did not give up, and we managed to find a company in Europe who would take my case. My message is to not wait to get this coverage if you are a business owner! The ultimate love letter to your staff is making sure that you can continue to pay them if you become ill or injured.
Individual policies can be expensive
Ask anyone why he or she doesn’t own an individual disability-income-insurance policy, and you’re likely to hear, “Because it’s expensive!” Although you pay for government disability insurance through your taxes, and your employer may pick up part of the cost of a group disability policy, quality individual disability policies cost a lot more money. You can try to lower the cost of an individual policy by reducing the benefit period, increasing the elimination period, or getting rid of features that you originally wanted. However, if you do this, you may end up with a policy that doesn’t meet your needs. The two most important factors to consider when lowering your premium is the elimination period and time period that disability income will be paid out to you.
If you have purchased disability insurance and then become disabled, you will have to wait a certain amount of time after the onset of your disability before you receive the benefits. If you are applying for benefits under a private insurance policy, this amount of time (called the elimination period) ranges from 30 to 720 days, although the most common period is 90 days. If you are applying for benefits under a type of social insurance, your waiting period may be over six months (for Social Security, for example). After you satisfy the elimination period, you will begin receiving a monthly disability benefit that usually replaces 50 to 70 percent of your earned income.
You can purchase private disability insurance policies that guarantee lifetime coverage, but they are very expensive. Most people buy either short-term policies (benefits are paid for up to two years) or long-term policies that pay benefits for a few years or up until age 65. In fact, many injuries or illnesses do not disable you permanently; you may be able to go back to work full-time after a rehabilitation period or return to work part-time. Most private and social insurance programs encourage you to go back to work either by paying you partial or full benefits while you try to work or by continually reevaluating your disability. In addition, they usually pay for any training or rehabilitation you might need to help you get back to work.
Why disability insurance is more important than you think
Typically, people buy property and casualty insurance to protect their possessions (houses, cars, and furniture) and life insurance to provide income for their survivors. But, many people don’t think about protecting their income with disability insurance. However, how well could you live without your income? Disability is an unpredictable event, and if you become disabled, your ability to earn a living will be restricted, at least for the short-term. Although you may have enough money in the bank to meet your short-term needs, what would happen if you were unable to work for months, or even years? The real value of disability insurance lies in its ability to protect you over the long haul.
Insurance –particularly disability income insurance –isn’t something to put off with the wave of your hand, thinking it couldn’t possibly happen to me. That is what I thought until it happened to me.