How Good Is Your Employer's Disability Insurance?
By Ric Edelman
In a 2009 Northwestern Mutual survey, many respondents said they didn’t need to buy disability insurance because coverage is provided by their employers.
But is such coverage sufficient? Evaluate your work policy by asking these questions:
How much of your wages or salary will the policy replace?
Your policy should replace 60% of your current income. That’s more than it appears to be, because disability benefits are tax free. However, if your employer pays for your coverage, any disability benefits you receive will be taxable, meaning you’ll end up with just 40% of your current pay. Could you live on that?
How is “disability” defined?
You want a policy that says you are disabled if you cannot perform the main (or material or substantial) duties of your occupation — as opposed to any occupation.
Are partial or residual benefits available?
While you’re rehabilitating or recovering from your disability, you may experience a period when you’re able to work part time. Some policies require you to be unable to work at all; part-time employment would void your right to benefits. Therefore, you want a policy that pays partial disability benefits. It is good to have a policy that pays “residual” benefits, which are payable for the entire time you are eligible to receive disability benefits, beginning when your post-disability earnings are at least 20% less than your prior income.
How long must you wait before benefits begin?
The longer you must wait, the bigger your financial loss — but the cheaper the policy. Make sure you can afford to wait for the benefits to begin.
Are your benefits reduced if you receive Social Security Disability income?
It’s difficult to qualify for Social Security Disability benefits, but some policies reduce benefits by the amount you receive from Social Security. Ideally, you want a policy where benefits are not reduced due to income you receive from other sources.
Will your benefits increase after you are disabled?
They should, so that your disability payments keep up with increases in the cost of living.
How long will your policy pay benefits?
It’s possible you will be disabled for life. That means you want a policy that will pay benefits until your normal retirement age (at which point Social Security benefits begin). Fortunately, white-collar/professional workers generally can get such coverage, but policies for blue-collar workers are generally limited to paying benefits for five years.
If you need help reviewing your employer’s policy, talk to your financial advisor.
Originally published in Inside Personal Finance May 2010