Disability Insurance: Stitching Together an Income Protection Strategy

Fifty-one million workers in America are without disability insurance outside of the basic benefits available through Social Security, while a full 60% of U.S. households do not have enough liquid assets to cover three months of living expenses. It’s frightening how unprepared American workers are against the risk of disability.

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    Disability Insurance: Stitching Together an Income Protection Strategy

    Disability Insurance: Stitching Together an Income Protection Strategy

    It’s frightening how unprepared American workers are against the risk of disability.

    Fifty-one million workers in America are without disability insurance outside of the basic benefits available through Social Security, while a full 60% of U.S. households do not have enough liquid assets to cover three months of living expenses.1

    Yet, the chance of missing work due to disability is quite high. Today’s 20-something workers, for instance, have a 25% chance of being unable to work for at least a year due to a disabling condition before they reach retirement age.2

    Coordinating Group and Individual Disability Insurance Options

    Workers have two basic options for obtaining income protection in the event of disability: through a group disability plan or through an individual plan.

    A group disability insurance plan is typically offered by an employer or through a professional association. An employer may fully cover the cost of disability coverage, though in some instances an employee may be required to fund a portion of the premiums.

    The advantage of a group disability plan option is that it offers a simple process that does not require a medical exam to qualify for coverage. In instances where the employer pays the premiums, individuals receive this critical coverage at no cost to them.

    Of course, there may be limitations to the policy’s coverage, such as not covering bonuses and commissions. Moreover, the group plan’s long-term disability benefits may only extend for a limited period of time (e.g., 10 years) rather than up to retirement age.

    Group disability benefit payments are typically only for a percentage of an individual’s income (generally 40-70% for short-term disability and 60-80% for long-term disability) and subject to income taxes, making a group plan an incomplete income protection tool.

    This is where individual disability insurance can play an important role. A supplemental individual disability insurance policy can close the gap between what the group plan will pay and what represents sufficient income to maintain a desired standard of living.

    When calculating the supplemental benefit amount needed, individuals should remember that benefit payments are free of income taxes since insurance premiums are paid by the individual. Consequently, the coverage amount need not equal 100% of employment income since an individual’s take-home income is lower than gross income.

    There are advantages of purchasing an individual policy that go beyond tax-free income. An individual policy is portable so, unlike a group policy, its coverage doesn’t end upon leaving an employer; it is non-cancelable by the insurance company as long as the premiums are paid, and it protects future insurability in the event of an adverse change in an individual’s health situation.

    There is much to consider should a situation arise in which disability insurance may be necessary.  Individuals and their financial professionals should discuss options and ways to best ensure income should a need ever arise.  Also take a look at this risk management checklist to assess gaps in protection against life’s risks.

    Sources:

    1. https://disabilitycanhappen.org/disability-statistic/
    2. https://disabilitycanhappen.org/disability-statistic/

    Please reference disclosures: https://blog.americanportfolios.com/disclosures/

    About The Author

     

    Director of Insurance Products 
    631.439.4600, ext. 177 

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