I play golf every weekend with the same two guys, and we grab a quick meal after. It’s a weekly routine that we don’t break in any but the rarest circumstances. As usual, we have lively debates about everything under the sun on the course when traversing the distances between holes, and at the club after. Since we’re an eclectic mix of professions including a surgeon, a financial consultant and radio talk show host (sounds like the beginning of an ‘x, y, and z walk into a bar’ joke right?) we have a wide variety of topics to choose from, and even wider variety of opinions to put forth.
This week, the surgeon got to talking about one of his recent patients, who while attempting some roof restorations slipped and fell off the roof of his two story home, landing awkwardly on his ankle in the process. Due to certain complications that we needn’t go into, and the fact that he took too long to get to the hospital he now has to have a prosthetic limb attached, a life altering situation. That man had a long chat with our surgeon friend about how his medical bills were paid for by his health insurance, and if the untold would have happened his wife and daughter would have been financially stable through his life insurance benefits, but … he never thought he wouldn’t be able to work so didn’t make provisions for a situation like this. He’s a race horse trainer and needs two perfectly healthy feet to handle his charges.
I interjected at this point saying he should have got some disability insurance especially considering how physical his profession is, at this point both my friends mumbled something along the lines of too complicated and don’t know how it works, so I took it upon myself to explain the ins and outs of a policy such as this, and thought I may as well write it down for all those out there who are in the same boat as my two golfing partners.
Disability Insurance – the breakdown
It’s so true isn’t it? We insure our cars, our houses, our lives, our health but very few people insure the source that pays for all that insurance – our physical and mental faculties. Not understanding how disability insurance works isn’t a good enough excuse for such a high risk either, so here’s a break-down of what it entails and how it works.
Short term disability income (STD) insurance is offered by a lot of companies to their employees across the county. This means if you’re out for the count for a few weeks or even a couple of months, a part of your income is paid to you by the insurer to compensate for the fact that you’re disabled temporarily and can’t carry out your work as usual. The crucial one though is long term disability income (LTD), as it covers you when you’ve got a long term or permanent disability. Usually when we’re injured or disabled for a few weeks or months, even if we’re not insured, the financial hit isn’t that difficult to recover from, the difficult bit is when our lives are altered by disability, that’s when we need help.
The 60% cap
Most if not all insurers will refuse to offer you an LTD of with coverage of more than 60% of your current salary. This is because they want you going back to work if you recover over time, and honestly who would if you were being paid your whole salary while sitting at home, doing nothing?
Income tax on payout received through disability insurance
If the company you work for is paying for your disability insurance premium, they’ll get a tax rebate on it; hence your income supplemented through the policy will be taxable. If you pay for the policy out of your own pocket however, you’re paying out of pre-taxed income; hence the policy pay-out will be tax free.
Each contract for LTD will have a list of criteria which can be altered for broader coverage terms and a consequently higher price. These criteria are usually the stumbling block for most people. They have been briefly addressed below.
- Own/any occupation: means you receive money if you are unable to perform just your occupation or any type of occupation under the sun. Unless you’re working a minimum wage job, it’s better to opt for own occupation, as otherwise, as long as you can carry out any job, even a minimum wage one, you won’t receive the benefits.
- Elimination gap: this refers to the time lapse between you suffering from your disability and receiving the payouts. A shorter time frame will have a higher premium and vice versa, so if you have a decent amount of cash stashed away, save some premium cost by increasing the elimination period.
- Renewability: meaning is the insurance company contractually compelled to renew this policy indefinitely or can they alter the terms. Don’t give the any leeway here, because the more unscrupulous ones will take the opportunity to make the most of this stipulation and leave you in the lurch.
- Cost of living adjustment and future insurability. They are similar terms hence clubbed together. They refer to inflation from period of buying the coverage and when it comes into force. So if you bought it in the 90s for around $1000 a month, and it comes into force now in 2013, that money won’t be nearly enough, so with higher costs of living, the policy payout will also rise if these two clauses are inserted.
- Base, residual and social security benefit. Base benefit is the basic amount you receive every month. Residual benefit means if you’re able to work part-time you’ll still receive a percentage of the benefits, without this you’ll only receive payout if you are completely disabled. Social security benefit means you can get a cheaper LTD hoping the government funded social security benefit for disability will mitigate some of your costs. This is risky though as the eligibility criteria for the social security program are highly stringent so you may not qualify.
According to the government’s US census figures, 12.1% of all citizens above the age of 16, not part of an old age home, mental institute, jailed or part of the armed forces, which in other words is the employable pool of the country’s population, is disabled. With such a high figure, it’s better to cover your salary, because you yourself are your strongest money making asset, and this ability of yours should be protected.
A few resources to help you learn more about disability insurance:
- Disability insurance calculator
- Facts about disabilities
Images: ”Photo of a mature businessman with multiple injuries sitting at his desk struggling to work on his computer. /Shutterstock.com“
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