Many people understand the importance of life insurance in protecting dependents in the event of premature death. But sometimes disability insurance is dismissed as less important. The reality of the matter is that disability insurance is just as important if not more. For most individuals, their earning power is the most valuable asset they own. For example, let’s say you earn $50,000 per year for 40 years at a 2% annual increase for inflation. This will total to over $3 million dollars over that timespan.
Statistics show that you are more likely to suffer a premature disability than an early death. According to the Social Security Administration (SSA), about 1 in 4 of today’s 20 year-olds will become disabled before reaching age 67. Another sobering stat from SSA is that 67% of the private sector workforce has no long-term disability insurance.
Unlike life insurance, long-term disability insurance protection is critical even if you don’t have dependents. Yes, you want to protect your children, your spouse, maybe parents, or others who depend on you financially. But illness or injury can strike at any time. How will you take care of yourself and your own bills and expenses if you cannot earn an income?
You may qualify for Social Security Disability Insurance (SSDI) benefits. But if such benefits are insufficient or unattainable, you may have other options. You may obtain long-term disability insurance on your own with an individual policy, or via a group plan if offered by your employer.
Social Security Disability Insurance (SSDI)
In order to be eligible to collect SSDI, you must have earned wages and paid into the social security system usually via payroll taxes. You also must have worked a specific amount of time before your disability, depending on your age. This can range anywhere from 1.5 to 9.5 years.
SSDI Has A Strict Definition of Disability
The definition of a disability is very strict under the SSDI program. An individual’s injury or illness must prevent them from performing their work at their usual job. However, the disability must also prevent the individual from doing other jobs too. The disability must also be expected to last at least one year or result in death. You must be unable to do basic activities such as walking, lifting, standing, sitting, and remembering.
Benefits From SSDI May Be Insufficient
SSDI benefits can be very helpful to those receiving them. But they are generally not enough for most disabled workers. As of 2017, the average monthly SSDI benefit was $1,170, and the maximum is $2,687. The actual amount depends on your average past earnings. It can take anywhere from three to five months to process an SSDI application. Once you receive SSDI benefits for two years, you will automatically be eligible for Medicare coverage.
Family Members Can Also Receive SSDI Benefits
Family members can receive benefits as well. Your spouse can qualify for benefits based on your work history. Spouses qualify if they are 62 or older, or if they are caring for your child who is under 16 or disabled. Your children can also receive benefits if under 18 or if disabled before age 22. Each eligible family member may be eligible for up to 50% of your disability benefit. However, there is an overall family limit. This family limit is about 150% to 180% of your own benefit.
Other Public Benefits May Reduce Your SSDI Payments
Disability benefits from the Veterans Administration or private pensions or insurance do not affect SSDI. But workers’ compensation and other government disability benefits such as those from a state or local government may affect your SSDI benefits. If the total of all such benefits exceeds 80% of pre-disability earnings, the government will deduct the excess from your SSDI benefits.
You Must Meet Income Requirements for SSDI Benefits to Continue
If you earn above a certain amount, you will not be considered disabled for SSDI purposes. In 2017, if you make more than $1,170 ($1,950 if blind) per month, you are considered engaged in “substantial gainful activity” and are therefore not disabled. However, there is a nine month trial work period in which there is no earnings maximum.
For 2017, any month in which you make more than $840 will be counted as a trial month. The 9 months do not have to be consecutive, but they must be within a five year period. After 9 trial months, you cannot make more than the aforementioned thresholds and still qualify for benefits.
SSDI is Long Term Disability Insurance
SSDI is a long term type of disability insurance. You may be eligible to receive benefits for several years. Possibly up until you reach retirement age and claim regular Social Security benefits. However, benefits usually don’t start until the sixth month after the application is made.
When Do Insurers Consider You To Be Disabled?
Disability policies define disability in different ways. Generally, the more liberal the definition, the higher the premium will be. Stricter definitions of disability apply to higher risk applicants.
This is a liberal definition of a disability. It means that you cannot perform the required duties for the job in which you are trained and have worked at in the past.
SSDI uses a form of the “any occupation” definition of disability. This is a more strict definition. You have to be disabled to the point where you not only cannot do your own occupation’s work, but you are also unable to work at any other job.
Some policies use both of the above terms in determining if you are disabled. For example, they may use “own occupation” for the first two years of disability. Then you may have to qualify under the more strict “any occupation” definition to continue to be eligible for benefits.
Loss of Income
Rather than determine which job functions you can perform, this “loss of income” policies determine how much your income has decreased due to your medical condition. Policies which use this definition of disability usually require at least a 20% loss of income before they pay benefits.
Disabled But Also Working
“Own occupation” or “any occupation” policies can have “residual” or “partial” disability features. Once disabled, you may work fewer hours at your own occupation. Alternatively, you may be able to work making less money at another lower paying job. Either way, your income will be less. If this income drop exceeds 20%, you may be eligible for partial benefits. These features are important because you can work part time and still get some benefits. Without them, your benefit payments may stop if you are disabled but work fewer hours, or at a lower paying and less demanding job.
The elimination period is a key term to understand when it comes to disability insurance. It represents the time from which you are disabled until the time you are eligible for benefits. Once the elimination period is over, it may take up to an additional 30 days to receive your first check. Elimination periods can vary widely. But they most commonly range from 30 to 90 days. Premiums are lower for policies with higher elimination periods. As such, a 90 day elimination period is generally recommended.
Short Term Disability Insurance
Purchasing individual short term disability insurance is generally not recommended. You should be able to fund short term income gaps with emergency savings or employer provided short-term disability group coverage.
Short term coverage usually lasts three to six months. But it can last up to two years. The elimination period for such policies can be as short as zero to 15 days.
If your employer offers short term coverage, you should participate. Workers’ compensation insurance generally covers injuries on the job. But an injury or illness outside of work may allow you to file a disability insurance claim. Once you become disabled and file a claim, your employer may require you to use up your sick days before the short term disability coverage kicks in.
Five states mandate employers to provide temporary or short-term disability insurance for their employees. These states are California, Hawaii, New Jersey, New York, and Rhode Island.
Short Term Coverage May Not Be Enough
Many disabilities often last several years. If a disability is long term in nature, your short term coverage or emergency reserves should hold you over until a long term disability policy begins payments. Some larger employers offer long term disability coverage through group plans. However, this is usually only available to professionals, technical workers, and other similar lower risk occupations.
Keep in mind that you will usually have to work at a new employer for a period of time before you can qualify for coverage. Also, group policies may not be convertible to individual policies upon separation from your employer. A loss of coverage would result in such a case. This can make the purchase of an individual long term disability insurance policy all the more important.
Long Term Disability Insurance
Advisors generally recommend purchasing individual long term disability insurance if you need to protect your income from a prolonged disability. Long term policies typically cover you anywhere from two years up until age 65. The longer the benefit period, the more expensive the premiums will be. Some higher risk applicants may not qualify for long benefit periods.
Your health, age, gender, alcohol or tobacco use, and occupation are major factors in determining eligibility for coverage and the cost of premiums. Professionals and white-collar workers are relatively more insurable than blue-collar types of workers. Underwriters will also look at other sources of income, length of work history, among other criteria. Insurers generally exclude preexisting conditions and dangerous activities from coverage.
High paying, skilled, white-collar jobs generally have the lowest risk rating when it comes to disability insurance. Individuals in such occupations are more likely to want to get back to work once disabled. Not to mention that the risk of injury at such jobs is minimal. Examples of these types of occupations include corporate executives, accountants, lawyers, and architects.
On the other hand, lower paying, unskilled, or physically demanding jobs generally carry higher risk for insurers. The motivation to return to work may not be as high in these occupations. Not to mention that the risk of injury is generally greater. Examples may include bricklayers, baggage handlers, or unskilled clerks.
How Much Long-Term Disability Insurance Do You Need?
If you depend on your income for living expenses and funding of future goals, you should insure as much of it as possible. You will generally not be able to insure 100% of your gross earnings. But you should be able to insure approximately 60 to 70 % of your income on average. You can generally replace a higher percentage if you earn a below average income, and a lower percentage if you make more. Most insurers generally reduce your benefits by the amount of any SSDI benefits received.
You should also pay your premiums yourself with after-tax dollars. This way, your benefits will be tax exempt, and will approximate your past income net of tax. If your employer pays your premiums, or you pay them with pre-tax dollars, any benefits received will be taxable.
Disability insurance can provide you with peace of mind. Insuring your earning power should be a primary goal for most individuals. As with any other insurance policy, you should review your coverage periodically, and monitor your company’s financial strength. Your finances and dependency on your income can change over time. So too can the financial health of your insurer and the terms of your coverage.