How would you replace your lost income?
Do you have an income replacement plan if you were to suffer a disability and were too sick or hurt to work? Your income is the foundation of your financial plan. It's what makes everything else possible. So just as you protect yourself against unexpected property damage, medical expenses and loss of life, you should also protect yourself against loss of income due to disability. Disability insurance or income replacement insurance as it is sometimes called can help you do just that.
Group Short-Term Disability Insurance and Group Long-Term Disability Insurance
Surprisingly, according to a Public Opinions Strategies Survey conducted by the Health Insurance Association of America in 1997, less than half of U.S. employees have employer-paid income protection. If your employer offers a group long term disability (LTD) program or group short term disability (STD) program, it may replace a portion of your income should you become to sick or hurt to work. This is a valuable income replacement benefit and a good safety net, yet because the benefits are often taxed, some people find their group LTD benefits may not be enough.
Can you live on 42% of your income?
Since group disability insurance benefits are usually taxable, even a typical policy covering 60% of your income might not be enough. Individual disability income (DI) insurance can help supplement your group disability benefits to better meet your income replacement needs.
****If you were earning $75,000 per year and had a group long-term disability plan that covered you for 60% ($3750 per month before taxes), after taxes you would end up with only 42% ($2625 per month after taxes) of your earned income assuming a 30% combined tax rate***
If you became disabled, you may be eligible for Social Security benefits, although according to the Social Security Forum (volume 21, no. 5 - May 1999) more than half of all claims submitted to Social Security are denied.
According to the Social Security Handbook, you are not considered "disabled" or entitled to disabled worker's benefits unless you meet all of the following four conditions.
1. You cannot engage in any substantial gainful activity because of a physical or mental impairment. You must not only be unable to do your previous work, but also any other type of work, considering your age, education and work experience (It does not matter whether such work exists in your immediate area, whether a specific job vacancy exists, or whether you would be hired if you applied for such work.)
2. Your impairment(s) is determined medically by a doctor.
3. It is expected that your impairment(s) can either result in death or last for at least 12 months in a row.
4. Your impairment must be the primary reason for your inability to engage in substantial gainful activity.
If your claim is approved, there is a six-month waiting period before benefits will begin. Benefits typically replace only a fraction of pre-disability income.
If your disability results from a work-related illness or injury on the job, you may be eligible to receive benefits from your employer's worker's compensation insurance. Coverage and benefits vary from state to state.
According to the National Safety Council; JHA 2002 U.S. Group Disability Rate and Risk Management Survey, less than 4% of all disabilities occur as a result of an on the job injury or illness.
Even if you regularly save 10 percent of your income, one year of disability could easily wipe out many years of savings. A one year disability could wipe out as much as 10 years of savings. And what would be left for the future? For retirement?
What bank would lend you money if you were too sick or hurt and could not work?
Could you maintain your standard of living without placing additional strain on yourself and your family?
Individual Disability Income Insurance
An affordable personal policy could provide you with a monthly benefit that is income tax free when you pay the premium. For most workers, even those with some employer-paid coverage, an individual disability income policy is the best way to ensure adequate income in the event of disability. When you buy a private disability income policy, you can expect to replace from 50% to 70% of income. Insurers won't replace all your income because they want you to have an incentive to return to work. However, when you pay the premiums yourself, disability benefits are not taxed. (Benefits from employer-paid policies are subject to income tax.)