Let’s talk about disability, shall we? Specifically, disability insurance.
Yes, it’s an unpleasant (and boring) topic. But think of it this way. Whether or not you'll achieve your goals and dreams is predicated largely on one thing: your ability to earn income. If you become too sick to work, you lose the ability to follow through on your plan. It's really that simple. No income; no plan. Fortunately, you can shift a lot of these risks to insurance companies. They are in the business to assume such risks and absorb losses for you.
On that note, it’s a good idea to consider protecting your income through disability insurance. This would be especially true if you’re a high-income earner.
The good news is that a lot of you can get group disability insurance through work. If only things were as simple as getting the insurance through your employer and calling it a day.
And the bad news? Well, let me count the ways.
You can’t take your policy with you
Chances are you won’t stay at your job until you retire. You might switch jobs or decide to start your own business. You may even lose your job. At any rate, your coverage stops once you leave your current employer. Sometimes you are offered to convert the group coverage, but the converted coverage typically comes with higher premiums and more restrictions to qualify for benefits.
If you’re a high-income earner, your coverage will be tiny
Typically, group disability insurance covers 60% of your income, which seems reasonable. But it comes with a monthly cap, usually in the $5,000 to $10,000 range. Let’s say earn $30,000 a month. 60% of your monthly income is $18,000. So far so good. But if your group coverage caps at, say, $10,000, your coverage is for only 33.3% of your monthly income, not 60%. If the monthly cap is $6,000, it’s only 20%.
Your benefit is taxable
Your employer usually deducts the costs of your group disability insurance. What this means for you is that your benefits are treated as income, subject to income tax. In the above example, you make $30,000 a month and get $10,000 coverage. That covers only 33.3% of your income. But if you pay 28% income tax, your after-tax benefit is $7,200. Your coverage just went from 33.3% to 24% net of income tax.
You get coverage for your base salary, but not much else
With group disability insurance, your base salary is covered. But if you earn variable compensation like bonuses, commissions, and incentive pay, those are typically not covered. Not only that, if you are a business owner, your K-1 income is excluded from income eligible for monthly benefit.
You get lousy coverage
Unlike medical insurance, pre-existing conditions are still factors within group disability insurance. So, if you’re a new employee, you typically have to wait 3 to 6 months before you’re able to get benefits for existing medical conditions.
Also, you should review the Limitations, Reductions, and Offsets section of your group policy. Some benefits are limited to 12 to 24 months (instead of to age 65) for certain disorders like mental health, environmental allergies, musculoskeletal and connective tissues disorders, and the like. Additionally, your benefits can be further offset by sick pay, severance pay, Social Security disability pay, unemployment compensation, and other types of benefits and compensation you receive.
So, as you can see, your group disability coverage isn’t what it appears to be. To cover all employees, it has to be all things to all people. But you’re not “all people.” Your situation is unique as are your needs. You need to pay attention to the details. Think of how much income you will earn in your lifetime. If you’re in your peak earning years, it may be your biggest asset. So it pays to protect your income.
So, don't delay. Get individual disability coverage to supplement what's lacking in your group coverage.
Yes, that's extra cost for you, but think of it this way. Let's say Job A pays $100,000 a year with no benefits if you become too sick to work. But Job B pays $98,000 a year and pays $60,000 a year in tax-free benefits if you can't work. Wouldn't you choose Job B?
That's a no-brainer, especially if you fall into the high-income earner camp.
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