Disability income insurance, in my opinion, is the most underrated of all the insurances. Everyone thinks to buy life insurance but almost no one buys disability insurance, even though according to the Social Security Administration, for 20-year-olds, more than 1-in-4 of them becomes disabled before reaching retirement age. By far, the biggest asset most people will ever have is their ability to earn a paycheck. A 25-year-old making $50,000 per year will earn roughly $2.5 million over their working years and yet rarely thinks to insure that asset. How I explain it to people is “If you had a piece of equipment that produced $100,000 a year in profit, would you insure it?” They look at me like I’m crazy because of course they would. Well, you are that equipment, and depending on your occupation, you should consider insuring yourself.
First, see if your company offers long-term disability insurance. If they do, that’s a great start. Understand, though, that having it at work might not be enough. Often group plans are limited to 60% of your income up to a maximum of $6,000 of benefit per month. They are also only helpful as long as you stay at that job. Supplementing with a smaller individual policy may help fill in the gaps that group coverage leaves.
If you are self-employed, you should always buy individual coverage first! Then add a group plan. Individual policies factor in whether or not you have group coverage already in the total amount they will give you. Group does not look at individual, so always buy individual first.
Rates for men tend to be cheaper than for women unlike life insurance. Also, not all carriers will give you the same rating classification.
Here are some things you should consider when choosing a policy:
1. Noncancellable vs. guaranteed renewable: With a noncancellable and guaranteed renewable policy, there will be no changes to the premium or to the policy benefits through age 65 regardless of the insured's working status, health or income level. Whereas with just guaranteed renewable, the insurer cannot change the premium or the benefit for an individual, but it can make a change, with approval, to the premium for an entire group of policyholders, categorized by state, underwriting class or policy year..
2. Definition of disability — own occupation vs. own occupation but not working vs. any occupation:
• Own occupation policies provide coverage if the insured becomes unable to perform the substantial and material duties of their specific occupation, even if they are still able to work in another occupation.
• Own occupation but not working means you can’t work in your specific occupation and choose not to work in another. If you do go to work, they would stop or reduce payments
• Any occupation policies only provide total disability benefits if the insured is unable to work in any occupation.
3. Length of benefit: You can choose 5 years or to age 65 or possibly longer.
4. Waiting period: Disability income insurance policies have a waiting or elimination period before being able to receive benefit payments. Typically, 90 days is the standard waiting period and any longer that that might not be worth the small premium savings.
5. Cost of living adjustment (COLA): This additional feature for policies is a must for younger workers. Your disability benefit increases over time to keep pace with inflation.
6. Future purchase option/future increase option: This allows you to buy more insurance later when your income is most likely higher without having to go through medical underwriting again.
7. Automatic increase rider (AIR): This rider increases the monthly benefit for the first few years of a policy to keep pace with inflation.
8. Residual benefits: This rider pays a percentage of monthly earnings if the insured suffers a loss of income of 20 percent or more. This means I may be able to go back to work, but not as much as before.
9. Catastrophic rider (CAT): Pays an additional benefit if the insured is receiving total disability benefits and is unable to perform at least two activities of daily living (ADLs), has a severe cognitive impairment or is presumptively totally disabled.
10. Social insurance supplement rider (SIS): Pays a benefit as long as the insured is not receiving benefits from Social Security Disability (SSDI). If the insured receives benefits from SSDI, then the SIS rider benefit is reduced dollar-for-dollar for benefits received under SSDI. Sometimes used to decrease the overall cost of a disability insurance policy.
As you can see, there is a lot to consider when choosing a disability income insurance policy. You should also remember that disability coverage usually only replaces 60 percent of your income, (though it may be tax free) so you shouldn’t rely on it completely.
T. Eric Reich, CIMA, CFP, CLU, ChFC is president and founder of Reich Asset Management and can be reached at 609-486-5073 or email@example.com.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.