Most Americans do not have disability insurance in their employee benefit package, but those who do may have a false sense of security. When approached about disability insurance, many are quick to say: “I have disability insurance coverage at work.” Have you ever really done an examination of just what your benefit might look like?
Question 1: How much would your monthly benefit check be?
Sixty percent of salary sounds like a reasonable amount to cover essential expenses at least for a short time. Calculate a potential monthly benefit check, assuming a benefit amount of 60 percent of salary. For example, the monthly gross benefit for someone earning $120,000 would appear to be $6,000. (120,000 x.60)/12. However, there’s a good chance the benefit could be less than that, as you’ll see in the questions below.
Question 2: Does your work plan include bonus or commission as part of the “annual salary” used for benefit calculation?
Most group disability plans do not include commission or bonus in the policy definition of salary. Even though bonuses may not be guaranteed, annual household spending patterns often count on an annual bonus. Update the benefit calculation adjusting for commission or bonus in the annual salary.
Question 3: Does your plan have a monthly benefit maximum?
Disability plans usually apply a maximum to the monthly benefit such as $5,000 per month. Adjust the benefit calculation to reflect the maximum benefit amount. In our example, a $6,000 monthly benefit is reduced to $5,000 due to the benefit cap.
Question 4: Is Your work benefit taxed?
If the employer is paying for the coverage, the benefit is taxed, leaving the employee an even smaller take home benefit. In this case, if we apply a 25% tax to the $5,000 benefit, the employee is taking home $3,750 each month. Conversely, individual disability insurance policies typically are not subject to tax because the premium is paid by the insured.
Question 5: How long will could you cover expenses at this level of income?
Most disabilities are temporary and resolved within two years. Using the benefit calculation from the previous steps, evaluate your financial position after a disability of 6 months, 12 months, and 2 years.
The features of individual disability insurance policies address each of the limitations addressed above. They have a broader definition of salary, a higher maximum monthly benefit, and are usually not taxed. Best of all, the coverage is portable and not contingent upon the employer. For a small percentage of your salary, typically between 1-3%, disability insurance can help protect the asset you rely on most-your income.
Let us know if you’d like to discuss Individual Disability Income insurance.
Reprinted with permission by Northeast Brokerage.
