Q. Our employer is signing us up for long-term disability insurance. He’s increasing our pay, then deducting the premiums from our paychecks. Most of us are young and healthy, and we’d rather have the money. Should we ask? – The employees
A. If you’re counting on “earned income” to pay living expenses and save for the future, long-term disability insurance is required, whether you have dependents or not. Statistically, one in every seven people age 35 to 65 will be disabled for five years or more, and the financial consequence of long-term disability is catastrophic.
Group policies lay the foundation for many workers’ long-term disability plans. Here are a few basics about this important coverage:
• Group disability usually covers 60 percent of your earnings, subject to a maximum monthly benefit. For example, if you earn $4,000 a month, 60 percent would be $2,400. But if the maximum benefit is $2,000 a month, that’s the most you’ll receive. And you may need additional coverage.
• How benefits are taxed is important. If your employer pays the premiums, benefits are 100 percent taxable. But if you pay them, benefits paid are 100 percent tax-free. That’s a huge difference, especially when you consider only 60 to 80 percent of your earnings are insurable.
• Many group policies use a “split definition” of disability. For example, they may pay benefits if you can’t perform the principal duties of your “own occupation” for up to two years. Thereafter, they may pay only if you are unable to perform the principal duties of “any occupation.” This can create a serious hardship for a high-earning worker who can perform a low-earning job.
• All group policies have a benefit period. In general, benefits begin after you’ve been disabled for a certain period of time, like three or six months. During this “elimination period,” you must be prepared to live on sick leave, emergency cash reserves and other resources. Once you’ve met this requirement, benefits usually go to age 65 or full retirement age.
• Most group disability provides benefits if you’re disabled due to “any accident or illness.” This is critical. Workers’ compensation pays only if you have a work-related disability, and only 10 percent of all disabilities are work-related. Similarly, Social Security pays only if your disability is expected to last at least 12 months or result in death. Only 39 percent of those who apply for Social Security benefits are approved.
• Some group policies pay to help get disabled workers back to work. This may take the form of residual or partial disability benefits, or rehabilitative services. This helps control their costs and keep your premiums low.
After laying the foundation with group disability, you need to determine if you need further coverage. For example, you may need a larger monthly benefit. You may need “own occupation” coverage for a longer period of time. Or you may need residual disability benefits. A reputable insurance agent can help you with this analysis.
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