If you were asked the question, “What is your most valuable asset,” you might reply, “My house,” “my car,” “my art collection” or “my prized boat.” Those are all great achievements in life, but would you be able to have any of these things if you didn’t have the biggest asset of them all – your paycheck?
According to the Social Security Administration, one in four of today’s 20-year-olds will become disabled before they die. If that isn’t scary enough, 43 percent of all people age 40 will have a longterm disability event prior to the age of 65, according to the JHA Disability Fact Book. With those startling facts, it would only make sense that protecting your paycheck is one – if not the most – important financial planning decision you can make.
The need for Disability Insurance (DI) is not a conversation that many like to have. In fact, it probably ranks up there with talking about life insurance. When you’re healthy, the thought of ever being disabled seems about as improbable as your chances to win the lotto. Most believe that “it will never happen to me.” Thus many Americans are left unprotected from the threat of losing their paycheck at exactly the time when disability insurance should be purchased.
The American Payroll Association Survey reports that 68 percent of Americans live paycheck to paycheck and would find it difficult to meet their financial obligations if their paychecks were delayed for a week. That statistic doesn’t speak highly of how well prepared we all are for a financial hiccup. That’s where disability insurance becomes a cornerstone in a strong financial foundation.
DI was created to fill a gap left when shortterm disability – which is more readily available and is often offered in the form of “sick leave” from an employer – runs dry, and provides a safety net to deliver a much needed disability paycheck.
DI can be purchased in two different flavors: group and individual. The benefits available to you are based on your occupation and income, where those with professional occupations like doctors and lawyers usually have access to better policies. It’s common that someone might purchase a group policy through work, and then add a supplemental individual policy on top to provide a double layer of protection for their paycheck.
Group disability may be acquired through your employer and offers an income replacement rate up to 60 percent of your income, to a maximum of usually $5,000 to $15,000 as a monthly taxable amount, depending on the company you work for. Some of the benefits of group plans are not as attractive as an individual policy. For instance, they are not portable (meaning when you leave the company, your disability policy leaves you), offer usually a 90-day elimination period to age 65 or Social Security age (this is how long you have to wait to collect benefits) and are always cancellable (which means the insurance company can cancel your benefits at any time).
While group disability insurance is often the easiest way for employees to protect themselves, an individual policy is definitely worth an investment of time for a comparison. With an individual policy, your benefits are portable (meaning they aren’t tied to your job), will usually allow you to get 6065 percent of your income as a benefit, and because you, rather than the employer, pay the premiums, the benefits are taxfree. In addition, individual policies can be bought with a much better occupation definition and are noncancellable guaranteed renewable – which means the insurance company can’t ever cancel the policy or raise the premium. This is important to you if you are paying the premium.
Perhaps you are like the millions of people who think Social Security Disability Insurance (SSDI) will be your answer should you need disability funds. You might want to think again. Qualifying for Social Security benefits and receiving payments can take up to two years, and most initial applications are denied. To receive SSDI, you must wait a mandatory 5 months after your onset date – the date in which you filed your disability application – and be unable to do any type of job. You also need to have accumulated enough work credits to qualify. If you do receive SSDI eventually, your current DI carrier will reduce your benefit equivalent to your SSDI check. As they say, “There is no double dipping when it comes to disability income.”
At the end of the day, some disability coverage is better than none. Protecting your paycheck – your most valuable asset – is one of the smartest financial decisions you can make for yourself and your family. After all, the statistics alone tell a compelling story about just how many people are in need of this invaluable protection. Work with a CFP® professional to determine the type of coverage that’s right for you.