You likely have disability coverage through your employer. But there could be things about your policy that are missing, or it may not really provide the protection you think it does. Here’s where supplemental coverage can kick in.
What’s Disability Insurance?
At a high level, disability insurance covers your salary should you suddenly be unable to work due to a disability. However, exactly what it covers and when coverage kicks in isn’t always so clear. Unlike life insurance that’s rather black-and-white, disability coverage is subject to a lot of caveats. There are also additional bells and whistles that you need to understand to make sure you are getting the maximum benefit you can.
For starters, you need to understand the difference between short-term and long-term disability.
- Short-term coverage is usually for a disability that is expected to last somewhere between 3-6 months and generally covers about 80% of salary.
- Long-term coverage is for disabilities that are expected to last much longer, often two years or more. Depending on what your policy says, the coverage period could be much longer and even through to retirement. Payouts for long-term disabilities tend to be smaller than short-term policies and typically replace about 60-70% of the salary you earned while you were working.
Like other types of insurance, you may be covered through a workplace plan or buy coverage through an insurer. Many employers offer good group coverage, but it might not be enough.
Here are some reasons why.
You Have A Lot Of Wealth In Equity
If your income is derived from sources other than a straight salary, pay close attention to your policy coverage. If you are an executive or in upper management, that’s probably you. Equity compensation is likely a significant part of your salary.
The reason that may complicate your disability insurance coverage is your payout is based on the value of your base salary – not Restricted Stock Units (RSUs) that are about to vest.
If a lot of your annual income or wealth is in equity, you’ll likely need a more substantial policy to maintain your standard of living should you become disabled and that equity stops.
Group Policies Have Low Monthly Caps
The fact that you are highly compensated may also create a potential complication. While your policy may say that it will pay 60% of your salary, there’s usually a caveat: a monthly cap.
Most policies include a $10,000-a-month payment cap.
Suppose you’re making $275,00 with a 60% payout. That should be $165,000, right? But if your policy includes a $10,000 monthly cap you’ll only get $120,000 – which is just 44% of your salary!
Don’t get fooled by the advertisements. That replacement percentage may not go as far as it would seem on the surface. If you’re making $200,000 or more, you’ll benefit from supplemental coverage.
Then consider how your policy treats Social Security Disability Income (SSDI). Many policies treat SSDI as an offset and only cover the difference between your SSDI payment and the income replacement percentage in your policy.
The Definition of Disability Might Change (Seriously)
What does disability mean? It means whatever your policy says it means! There are two options:
- Own occupation – disabled means you can no longer perform the same job.
- Any occupation – disabled means you can no longer perform ANY job.
An “own occupation” policy is worth more than an “any occupation” policy because it will start paying you when you can no longer do the job you had. That may not be much of a surprise to you.
The surprise may come in knowing that your policy may switch definitions from own to any after a certain period, such as when you’ve been receiving payments for two years. Be sure to read the fine print because this can make a huge difference. That would mean that if you’re still capable of working any job (even if it pays much less or is in a completely different career field) and you don’t, then your benefits would stop.
With an “own occupation” policy you are allowed to take on a different lower paying job if you are able and still receive disability payments.
These are just the basics. There are many nuances to this part of disability coverage. A supplemental policy that provides the right coverage or closes gaps in your employer plan can be a big help.
You Can Purchase Different Riders To Help
Supplemental policies are highly customizable. Depending on the coverage you need or want, you can choose from a list of riders that alter the basic policy. Think of it like picking options from a menu.
Whether you have a stand-alone policy or need to supplement a policy provided by your employer, these riders allow you to tailor your coverage and reduce the particular risks you are exposed to.
A significant benefit of closing coverage gaps with your own policy are the payouts you receive from a plan you purchase on your own are tax-free. The same is true if you pay the premium for the employer policy, although it’s not always offered. If you’re unsure if paying the premium is an option, ask HR. You may even notice an employer providing an offsetting income equal to the cost of the policy. This allows you to technically pay the premium to receive benefits tax-free, while also receiving income to cover the expense.
If you need help evaluating your coverage options or want to learn more, consider downloading our guide “What issues should I consider when purchasing DI insurance” and contact us to discuss your needs in depth.