Disability Insurance: Fitting Your Family’s Goals, Your Lifestyle and Your Profession

A disability insurance policy can provide financial protection for you and your family if you were to become ill, experience an injury that prevented you from working or working in your specialized field. Evaluating your disability insurance coverage is an essential step for many working professionals.

Overview of Disability Insurance

YOU CAN USE A DISABILITY INSURANCE POLICY TO TRANSFER THE RISK of your unexpected inability to work to an insurance company, rather than you or your family retaining that risk. 

A disability insurance policy can provide financial protection for you and your family if you were to become ill, experience an injury that prevented you from working or working in your specialized field. Evaluating your disability insurance coverage is an essential step for many working professionals.

A disability insurance policy only covers you, or whoever is the insured person. It does not provide coverage to other family members. As you consider whether this type of coverage is right for you and your family, personalizing solutions for you AND your spouse is possible.

Disability insurance is available as both a short-term policy and a long-term policy. As the names suggest, each provides coverage for different benefit periods.

The Benefit Period is the maximum length of time that the disability benefits will be paid:

• Short-term: Typically ranges from three to six months.

• Long-term: This can range from a few years to up to age 65-70. It is rare for a new LTDI policy to have a lifetime benefit period.

Given this dynamic, it’s helpful to view your disability insurance choices in terms of two distinct time periods.

Your disability insurance policy is active for as long as you continue to pay the premiums. When your policy expires, there is no cash value, savings/investment component to a disability insurance policy.

Short-Term Disability Insurance Considerations

How can you protect your family from short-term interruptions in your income? Short-term disability insurance is one option. This can be attractive if this benefit is automatically provided by your employer. Frequently, an individual short-term disability insurance policy is not the most cost-effective solution for families.

As an alternative, you can self-insure this specific risk by maintaining an emergency fund. Your emergency fund should be funded enough to bridge the gap between not getting paid for a similar duration as a short-term disability policy. With this approach, you could save the monthly insurance premium costs you aren’t paying into a dedicated emergency fund.

Short-term Disability and Your Pregnancy

Start by reviewing your employer’s benefits guide for short-term disability insurance (STDI) coverage. If you have short-term disability, it’s often provided to you with no direct out of pocket cost. Depending on your benefits package, you can file a short-term disability claim and be covered for a pre-determined time period while you are on leave.

Review your benefit amount and understand how this will be applied in your specific situation. Specifically, be on the lookout for reductions to your benefit amount after a set number of weeks.

Your benefit amount is the percentage of your income that will be paid as a benefit during the disability period.

• Short-term: Usually covers ~60-70% of your gross income.

• Long-term: Usually covers ~50-70% of your gross income.

The relationship between Short-term Disability, Paid Parental Leave, and the Family and Medical Leave Act (FMLA)

Simultaneous Use: You don’t have to choose either STDI or FMLA. If your health condition qualifies for both, you can use STDI for income replacement and take FMLA leave to protect your job.

If you plan to take paid parental leave, you can take FMLA leave to protect your job, too. Your employer-sponsored short-term disability insurance policy won’t allow you to receive paid parental leave and STDI payments.

You might be able to coordinate your STDI benefit for a period of time before or after you take paid parental leave. Sometimes just knowing what to research is enough to get started. If you’re unsure about your specific situation, your HR team should be able to provide you with employer-specific resources to review in the context of your personal situation.

Long-Term Disability

A long-term disability insurance policy decision typically has more complexity. This complexity is driven by its potentially long duration. If you’re considering, or reconsidering your coverage, there are a few avenues and features to be aware of during your evaluation process.

The right long-term disability insurance policy for your family can create certainty around how much financial support you’ll receive if you need it. It should be clear under what circumstances your policy is maintained, and when you would not be eligible.

Aside from your daily living expenses, the monthly benefit amount your long-term disability insurance policy can help in the following ways:

• Medical expenses related to the disability, which can be a significant financial burden if you are unable to work.

• Rehabilitation costs and help to maintain the individual’s standard of living.

• Maintain independence and self-sufficiency.

Ultimately, a strong long-term disability solution should address how you sustain a stable stream of income for your family if you are unable to work due to illness or injury until you reach retirement age.

Practical Considerations

Evaluate policies that best fit your specific situation.

Gather quotes and conduct due diligence on insurance companies and policies. Seek out unbiased, objective perspectives and information from professionals whose interests are aligned with your own.

Here are three practical approaches to consider during your application process:

1. Organize Your Information: Before you begin your disability insurance underwriting process, you’ll want to organize information on your medical history, employment details, tax returns, and other financial records. Consider requesting a checklist of the required documents and information from the insurance provider. Securely share and dispose of any of your personal/sensitive information.

2. Provide Truthful and Accurate Information in Your Application: The information you share should be accurate and truthful. Insurance companies rely, in part, on your information to assess your risk and determine the appropriate disability coverage and premiums. If you fail to disclose relevant information, your policy could get cancelled, or your claims could be denied. If you apply for long term disability policy, it’s common for you to go through full medical underwriting before the insurance company will approve, or decline, your coverage. While medical underwriting is not onerous, it adds extra time to the approval process.

3. Address Your Pre-Existing Conditions: Provide detailed information about your pre-existing conditions, including diagnosis, treatment history, and ongoing management plans. This information allows the insurance provider to evaluate your risk accurately. Failing to disclose pre-existing conditions can lead to claim denials or exclusions for related medical expenses in the future.

On another practical note, once you know which policy you need and how much your annual premium(s) will cost, automate saving for this priority. Periodically review your insurance coverages as your life changes.

What are the 3 Main Avenues to Obtain a Disability Policy?

There are three main avenues to purchase disability insurance for your individual coverage.

1. An individual policy
2. An employer-sponsored policy (sometimes called group disability)
3. An association-related policy

The third avenue for purchasing disability insurance, an association-related policy, this is commonly connected to a professional or medical association. such as the American Medical Association (AMA) or American Dental Association (ADA).

Association-related policies are individual policies that receive a discounted premium, preferential underwriting terms, or conditionally renewable features.

While many of the key terms are the same, association policies are worthy of a separate exploration. If you are a doctor, surgeon, or in a dental profession, you’re more likely to have access to an association policy than other professions.

Employer-Sponsored / Group Disability Insurance

Group long-term disability insurance is an employer-sponsored program to provide disability income to employees who are disabled (unable to work) beyond a period specified in the plan, usually six months.

These plans are designed to supplement the Social Security disability coverage available to employees who are eligible for SS benefits. Disability income under an employer plan usually continues for the duration of the disability, to age 65 or until death.

As you consider your employer-sponsored disability insurance options, it’s helpful to keep in mind the following:

• Cost: The cost of group disability can change from one benefit year to the next.

• No Portability: Group disability is tied to your employment. There is no portability.

• Benefit Amount: Depending on your plan, group disability benefits are usually limited to 50%-60% of your base salary only. There are sometimes supplemental options to increase this limit to 70%. This is intended to reduce moral hazard.

• Coordination: Your group benefits are coordinated with Social Security. As such, your group benefits can be reduced by the amount of Social Security benefits you receive.

Taxation of Group Benefits: An Employee’s Perspective

IF YOU ARE EVALUATING A DISABILITY INSURANCE POLICY available through your employer, you’ll want to understand how your benefits are taxed relative to an individual policy.

Any disability benefits you receive will be taxed as ordinary income if your employer pays the entire insurance premium.

If you, as an employee, pay a portion of the premium with your after-tax income, that same portion of the disability benefits are not taxed as ordinary income.

Long-Term Disability Definitions

Whether you are evaluating an individual, group, or association-related long-term disability insurance policy, it’s helpful to understand the different disability definitions used with respect to your “occupation”.

Here’s a quick overview:

• Any Occupation: An “any occupation” policy will only pay benefits if you cannot work in any occupation for which you are reasonably qualified based on your education, training, and experience. This is a relatively stringent definition of disability. You must be unable to work in any job that you are reasonably qualified to do based on your background, not just your current occupation.

• Own Occupation: Own-occupation disability insurance can pay benefits to policyholders who cannot perform the substantial and material duties of your specific occupation at the time of disability. There can be variations in how these benefits are paid if you are able to work in another job. Understand the exact terms of each policy to compare like policies with one another. For example, an own occupation policy may reduce benefits if you earn income from another job.

• True Own-Specialty Disability Insurance: This is for the medical community in particular. Under this definition of disability, you could collect full disability benefits if you can’t work in your medical specialty and choose to work in another career.

Depending on your policy’s definition of disability, if you find gainful employment outside of the job you had prior to your disability, your policy might not be required to pay you any benefit amount.

As you evaluate your options, keep in mind that the premiums increase as you go from any-, to own-, to “true” own-specialty occupation disability definitions.

Understanding Long Term Disability Riders

A rider on your disability insurance policy is an additional feature that you can add to your base policy. A rider provides an extra benefit or modifies the terms of the base policy’s coverage. Riders typically come at an additional cost. To quantify a rider’s benefit to you, you can evaluate how much value a particular rider would provide you. You would then want to compare this value to an alternative approach like saving, and/or investing, the money you would have spent on the rider.

Thoughtfully evaluating riders allows you to customize your disability insurance to better align with your coverage needs.

While the insurance industry is constantly evolving, here are some common riders found on disability insurance policies:

• Cost-of-Living Adjustment (COLA) rider: This rider increases your policy’s benefit amount periodically to keep up with inflation. This adjustment helps you maintain the purchasing power of your benefits over time.

• Waiver of Premium rider: A provision that allows you to stop paying premiums while receiving disability benefits, ensuring that your policy remains in force without additional cost.

• Future Increase Option (FIO) rider: Allows you to increase your coverage amount in the future without undergoing additional medical underwriting. This rider is beneficial if you expect your income to grow and want to ensure your coverage keeps pace with your increased financial needs. It can also be beneficial for professionals with adequate group disability coverage and who also purchased a portable supplemental disability insurance policy.

• For example, an FIO rider can act as a bridging solution if you plan to leave your current employer, or you are transitioning from medical residency, dental school, or law school inside of a near term time horizon (e.g. five years).
• An alternative to this rider is to wait and purchase a large individual policy later. The math on this rider might not pencil if you anticipate your income to significantly increase in the short term.

• Automatic Increase Benefit (AIB) rider: This rider can automatically increase your policy’s benefit amount using a predetermined frequency and percentage amount. As the name suggests, this automatic increase is mandatory, and your premiums will reflect this increased coverage amount. It can provide a structured way to ensure that your disability benefits keep up with income growth or inflation, without requiring you to take action.

• Catastrophic Disability rider: Provides additional benefits if you become catastrophically disabled and are unable to perform two or more activities of daily living (ADLs), such as bathing, dressing, or eating. Offers higher benefits in case of severe disabilities that require significant care and assistance.

• Student Loan rider: Helps cover the monthly cost of your student loan payments. This benefit is in addition to any other disability benefits you may receive. It is worth evaluating the cost of this rider if you have private student loans or have refinanced you student loans, especially if you have significant monthly payments. This rider is less effective if you have an income-driven repayment (IDR) plan. In which case, your student loan payments would scale with your disability income.

Key Term Comparison: Non-Cancellable vs. Guaranteed Renewable

Non-Cancellable: The insurer cannot cancel your policy, change any terms, or increase the premiums as long as the policyholder continues to pay the premiums on time.

For example, if you have a non-cancellable disability insurance policy at age 30 with a monthly premium of $200, your premium will remain $200 throughout the life of the policy.

This is beneficial when you value knowing how much your insurance premium will be each year and can afford high initial costs.

• Benefits
  • Absolute premium stability. Highest level of policyholder protection.
  • Predictable cost over the life of the policy.

• Drawbacks
  • Typically, there are higher initial premiums compared to guaranteed renewable policies.

Guaranteed Renewable: The insurer cannot cancel your policy if you pay the premiums. However, the insurer can increase your premiums but only on a class-wide basis, not individually.

When you need guaranteed coverage and prefer lower initial premiums. You understand and are willing to accept the risk of potential premium increases in the future.

• Benefits
  • Assures continued coverage without individual cancellation.
  • Typically, lower initial premiums compared to non-cancellable policies.

• Drawbacks
  • Potential for premium increases over time.
  • Less certainty about future costs.

Additional Key Terms

Here are key terms for your quick reference while as you evaluate your disability insurance options:

• Binder: A temporary agreement issued by the insurance company that provides proof of insurance coverage until a permanent policy is issued. It shows that the insurance policy is in force from the date of application until your policy is formally issued or declined.

• Contract Date: The effective date on which your insurance policy begins.

• Elimination Period: Time period between the start of your disability and when you start receiving benefit payments.
  • Short-term: this period is usually short, often ranging from 7 to 14 days.
  • Long-term: this period is typically either 90 or 180 days. While most new individual policies have a 90-day elimination period, employer-sponsored policies are more likely to have a 180-day elimination period than individual policies.

• Replacement Limit: The highest monthly disability benefit that an insurer will issue to you based on your earned income.

• Rehabilitation Benefits: Services or programs included in some long-term policies to help you return to work. These can include vocational training, physical therapy, or job placement services.

• Pre-Existing Condition: Any medical condition that existed before the start date of the disability insurance policy. A policy may have exclusions or waiting periods for pre-existing conditions.

• Partial Disability: A condition in which you can perform some, but not all, of your job duties.

• Residual Disability: A condition in which you can perform some, but not all, of your job duties or can work part-time. Your policy may provide partial benefits based on the loss of income.

• Recurrent Disability: A provision that allows for the continuation of benefits if your disability recurs within a certain period after the initial disability benefits period ends, without requiring a new elimination period.

• Coordination of Benefits: The process by which the policies benefits are adjusted to account for your other income sources, such as sick leave, workers’ compensation, or Social Security Disability Insurance (SSDI), to prevent over-insurance.

The Next Step

When you know who and what are truly important, you can create incredible clarity about your spending and saving.

Clarity to confidently spend on things that matter. Clarity to avoid spending your hard-earned resources on things that aren’t aligned with what you want in life.

As your financial planner in Saint Louis, we can help you plan for the future and enjoy the present moment.

Start feeling more confident that you are making progress toward your savings priorities and prepared for the unexpected bumps in your life.

Proactive and open collaboration with your financial, tax, and estate planning professionals can help you work towards your financial goals. Working with your financial planner in Saint Louis can provide you with the right mix of accountability, collaboration, and long-term thinking.

If you’re unsure about your next step, let’s talk.

Disclosure

This commentary is provided for educational and informational purposes only and should not be construed as investment, tax, or legal advice. The information contained herein has been obtained from sources deemed reliable but is not guaranteed and may become outdated or otherwise superseded without notice. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decision.