Most workers don’t get long-term disability insurance through work — national statistics have been pretty steady the past few years, showing that just under a third of employees have the protection. And, experts say, even those with the insurance may not have enough to be adequately covered.
Several professionals, including Brett Virgin, a partner with SoundRiver Advisors in Atlanta, and William F. Harris, an independent insurance agent in the Los Angeles area, suggest people review their employer-provided disability policy and consider buying additional coverage if necessary. And, they add, you should seriously think about buying your own coverage if you have no disability benefits at all. (Here’s more on buying individual disability insurance.)
“Some employees may not even know if they’re protected through work,” says Harris. “You want to be prepared. You don’t want to be surprised.”
The warning is underscored by the Council for Disability Awareness (CDA), which says that more than one in four people in their 20s will likely become disabled before retiring, And one in eight workers can expect to be disabled for five years or more before retirement. Also, the Pew Charitable Trusts, in a 2015 study, found that only 55 percent of workers have enough savings to replace a month of loss income.
Disability insurance pays a portion of your income if you become disabled and can’t work. National figures provided by companies and insurers in recent years show that employer-sponsored group policies generally pay out 40 to 60 percent of a worker’s base salary. But keep in mind that these policies can vary in the extent of coverage they provide. Some, for instance, cover only total disability, not partial disability.
An individual policy can be tailored to complement coverage you already have at work or provide the protection you need if you have no disability benefits. You can protect about 60 percent of your income tax-free through an individual policy, says John Nichols, founder and president of Disability Resource Group in Chicago.
The CDA notes that the annual premium for such a policy tends to range from about 1 percent to 3 percent of your gross income.
Several companies sell individual disability policies, including Unum, MetLife, MassMutual, State Farm, Mutual of Omaha and Principal Financial Group. All of them provide similar coverage, but Harris suggests doing research on each plan before buying coverage.
There are several factors that can affect the premium, including:
- Your occupation.
- Your age.
- Your medical history.
- Benefit amount.
- Waiting period.
- Benefit period.
- Optional riders, or add-ons, to the policy.
When applying for one of these policies, you’re asked for details on your medical history; you may also be required to have a basic physical exam. However, some policies feature simplified underwriting, which means you don’t have to go through an exam and it’s easier to qualify. Simplified underwriting is sometimes available for people who want to buy lower amounts of coverage.
You’ll likely pay more for an individual disability policy than you would for a group policy. With workplace group coverage, the employer usually pays part or all of the premium. Or sometimes the employer lets you buy coverage on your own at the group rate.
But an individual policy can offer advantages over an employer-sponsored group plan.
1. Disability benefits fit your needs
A prime benefit of an individual coverage, professionals agree, is that the policy can be customized.
You choose the size of the benefit and the options you want. A variety of riders, or add-ons, are available, such as a cost-of-living adjustment rider to protect you against inflation. Another common rider continues contributions to retirement savings while you’re disabled.
A good example of a highly tailored policy is MetLife’s Income Guard, which offers enhanced protection to physicians and dentists in specialties. Say, for instance, a neurosurgeon became disabled and was unable to work in his or her specialty. Through Income Guard, the neurosurgeon could still collect disability benefits until recovery or the start of a new medical career.
2. Benefits are tax-free
Benefits are not taxed, as long as you pay the premium and don’t fall behind on payments. In contrast, your benefits are taxed when your employer pays the premium for disability insurance. That, clearly, can substantially reduce your income.
3. The protection stays with you
Employer-sponsored coverage generally ends when you leave the company. In addition, your employer could decide to stop offering the benefit to save money.
But you control an individual policy. An individual disability policy is, in most cases, guaranteed renewable, which means it stays in effect as long as you pay the premiums.
4. You choose the insurer
With a group policy, you’re limited to the insurance company your employer chooses. When you buy an individual policy, you select the insurer.
Insurance professionals say it’s wise to start considering a policy once you graduate from college and start your first job. The sooner the better, they advise, because you never know when you might have health problems.
To get an idea of how much insurance might be right for you, check out the non-profit Life Happens’ “calculate your needs” disability insurance calculator.