Protecting Your Ass(ets): Disability Insurance
It’s the product that everyone pays for but no one actually wants to use: insurance. And if you are like me, you probably hate paying for something that you don’t plan on using! But if you haven’t thought about your disability insurance in a while - you probably should. Working aged Americans are 3 1/2 times more likely to suffer a disabling injury than die. According the the social security administration, almost 30% of Americans will suffer a disabling event during their career - and most of these have nothing to do with work. Accidents, back pain, arthritis, cancer and depression are just a few of the conditions that lead to disability claims. If you were out of work for even just a few months, how long could you support yourself or your family? Over half of home foreclosures are the result of a disability claim.
When I was graduating from veterinary school the nice representative from AVMA came to visit us and sold me a policy and without giving it much thought I have been making payments ever since. After all, it’s the AVMA, they must know what’s best for me. Besides, it’s a group policy, it must be the best price. Only recently have I really looked at my policy and really questioned if this was the right one my situation. When selecting something as important as disability insurance it pays to be an educated consumer.
When we talk about disability insurance we can break it down into two separate products: long and short term insurance. The exact definition of each can vary by insurance company and policy. Generally, short term disability policies will pay you a portion of you base salary (typically 60%-70%) after you suffer a disabling injury. Payments begin after a short waiting period (e.g. 2-3 weeks) and continue for months to a year depending on the policy. Long term disability policies typically replace 40%-60%of base salary and have a longer waiting period — typically 90 days. Benefits typically run until you, recover or a predetermined date, often (but not always) when you reach 65 years of age. Clearly there is a lot of variation between companies and policies so you have to read the fine print!
Some people seem to believe that these policies are limited to paying only a percentage of total salary because the disability payments are tax free. This is not really true. Insurance companies pay only a portion of your actual income so that you have an incentive to go back to work! But disability payments are tax-free, aren’t they? Actually it depends. Although some disability payments are tax-free, others are not. The determining factor is whether the policy was paid with pre or post tax dollars. For example, let’s say that you pay for your disability policy out of your own after tax income - so the money to pay the policy came out of your checking account. If you become disabled, the payments will likely be tax free. If you get your disability policy through your company and the payments are made with “pre-tax” income, then you will have to pay tax on any payments you receive. This is because the payments to the insurance company initially reduced your taxable income. One way or another the government is going to get its share!
So where do we start? Disability insurance is available through independent brokers who should be able to get you quotes from major insurance companies. Don’t accept a single quote - you want to see quotes from several companies. Be certain to compare policies to what’s offered by the AVMA. Depending on your circumstances this maybe your best bet. Long term policies are generally more complicated with different options, caveats and complexities. If your income includes both salary and production, be certain to ask how this affects the policy payout in the event of a disability.
Important things to consider when looking for a disability policy:
- How long could you support your family without an income. This is important when considering the waiting period of a policy. Maybe you could go 90 days without an income or maybe you need financial support immediately. If you are in the former category, then you only need long term disability otherwise consider long and short term disability coverage.
- How much income you you need to get by? Consider rent, auto, insurance, food, children’s tuition and all the other essential items that make up your budget and that is the monthly benefit you will need the policy to pay. Remember, no policy will pay your whole salary and depending on how the policy is paid for, you may still owe taxes.
Important options when considering long term policies:
- Own occupation coverage. So this is important- but the definition can vary from policy to policy. Historically, own occupation meant that if you were injured and could not work in your chosen occupation but could work in another position you would still meet the definition of disabled. For example, you are a boarded veterinary surgeon who is in an accident and can no longer perform surgery. You find a job teaching veterinary students in the classroom but at a much lower salary. In the past, some policies would let you collect your full disability payments and professor’s salary. Many policies now specify that you can collect your salary as a professor but the disability insurance will only pay the difference between what you made as a surgeon and what you now make as a professor. This is how the AVMA policy works and it kinda makes sense. Your policy should have this - otherwise if you are disabled and unable to work in the career that you trained for -but are able to work in a lower paying position, you will not be financially protected. Since the definition varies from policy to policy - pay close attention.
- Cost of living adjustment (COLA). With this, your monthly benefit payments automatically increase with inflation. Policies should have this or the value of your monthly payments will decrease each year with inflation.
- Future purchase option. Chances are that as your career advances, so will your income. This option allows an individual to purchase additional coverage with out the need for physical exams. So even if you suffer a health problem you can increase you coverage with your salary. You should have this, but keep an eye on your policy as you may only be able to increase coverage at specific time periods and / or for specific amounts. I missed an important date and was unable to increase my policy to keep up with my income.
How much will all this cost? It’s not cheap. Lots of factors go into the cost of disability insurance including age, health, gender, occupation, if you smoke, waiting period, income and length of benefits. Expect to spend 1%- 3% of your annual income per year. So it pays to compare offerings from different companies. Again, no one likes to pay for something they never plan to use, but with 30% of all working aged Americans experiencing a disabling event sometime during their employment, disability insurance is important!