According to the LIMRA (Life insurance Marketing and Research Association), just over one quarter of individuals 20 years of age will become disabled before they reach their retirement age. ¹
Most people have the misconception that accidents are the main cause of disability, but the data tells us a very different story. In fact, most claims originate from health-related problems such as cancer, musculoskeletal disorders, mental health, and heart attack.
Recognizing that incapacity is a real concern, the question arises when it comes to a long-term disability event, “do you have enough on hand to cover the loss of income?” The average claim is greater than 2 ½ years, and a scenario that lasts considerably longer could be devastating to maintaining one’s financial independence.
Therefore, it is prudent to review and evaluate your situation and update any changes that have occurred in your financial plan to evaluate how a disability event would impact your financial well-being.
In considering a disability plan there are many options available. The content below provides some insights on what to look for when you are comparing different companies’ policies.
Amount of coverage
When determining how much coverage you may need if you become disabled due to an illness or injury, consider your short-term and long-term living expenses. Generally, most policies will disburse between 50% and 70% of your income. Short-term disability, which typically covers disability ranging from 3-6 months, will pay 60-70% of your income, while long-term disability payments generally range from one year to your entire working life, and will cover 40-60% of your income.
Elimination period
An elimination period refers to the length of time the policyholder must wait between when an injury occurs, or illness begins, and when payments are received from the insurer. The most common elimination period is 90 days. However, these periods can vary from 30 to 365 days and will affect the premium amount paid. The longer the elimination period, the lower your premium. The appropriate elimination period will depend on how long you can afford to live without receiving benefit payments.
Portability
Given the fact that most individuals will change employers several times during their working career, purchasing an individual-owned policy from an insurance company could be a decision that pays dividends in the future. Though premiums in most cases are higher than what is offered through an employer’s plan, some mutual carriers pay dividends, which can reduce costs in the later years. In addition, purchasing the policy with a guaranteed renewable and non-cancellable feature protects the owner from any premium increases and benefit changes in the future.
Group disability coverage
The majority of employers that offer disability insurance pay some or all of the cost of the policy premiums. However, the employee may still need to evaluate whether this coverage is sufficient. Often employer coverage is inadequate, leading the employee to seek an additional individual disability insurance plan.
Taxable or tax-free income
Another consideration when evaluating disability insurance is taxes. If your employer pays the premiums on your disability insurance plan, the benefits will be taxable as this is considered income. However, policies obtained through a private insurance company in which the premiums are paid by the insured will pay out a disability benefit that is tax-free.
¹https://www.limra.com/siteassets/newsroom/fact-tank/fact-sheets/diam-2021-final.pdf
