If you're in the workforce, your most valuable asset isn't your home or car; it's your ability to earn a paycheck. Are you doing enough to protect it? Learn why your employer-sponsored disability insurance may not be enough and what you can do to keep your financial goals on track should an illness or injury keep you from working.
If you have disability income insurance as part of your benefits package at work, that’s great news. The monthly benefit your employer group disability plan provides can help replace some of your income if you get sick or injured and are unable to work. But is your employer’s plan enough?
Not sure? Here are a few things to consider.
Group long-term disability (LTD) insurance typically replaces 50-60 percent of base income (up to a certain cap) after a 90-day waiting period. Bonuses and commissions are not usually covered, and most plans cover income on a pre-tax basis, so whatever benefit you receive is subject to income tax. Many group plans also don’t cover partial disabilities or residual disabilities or provide cost-of-living adjustments so that your income can keep pace with inflation.
To understand what this could mean in dollars and cents, consider this hypothetical example.
Let’s say John earns $75,000 a year ($6,250 per month), which includes a $65,000 base salary plus a $10,000 incentive bonus. Assume also that he pays federal and state taxes at a combined rate of 30 percent. That means John has an annual after-tax income of $52,500, or $4,375 per month.
What if the unthinkable happens—what if John has a stroke and is unable to return to work for the foreseeable future?
After a 90-day waiting period, during which John’s family had to tap their personal savings to meet living expenses, John’s group disability insurance plan begins to kick in.
John’s group plan limits compensation to solely base pay, which means his benefit will be calculated using only his $65,000 salary; his $10,000 incentive pay would be excluded. With a 60 percent replacement rate, John can expect to receive a pre-tax benefit of $3,250 ($65,000 x 60 percent/ 12 months) for each month he is unable to work.
Because John’s group disability premiums are employer-paid, his $3,250 monthly benefit is subject to tax. Assuming John’s tax rate remains unchanged, his disability benefit would be reduced by 30 percent, which leaves him with just $2,275 per month to meet medical and living expenses. This means John’s group plan actually replaces just 52 percent of his normal after-tax pay in the event of disability.
As you think about whether your group disability insurance plan is enough to protect you and your family’s lifestyle, ask yourself: What would you do if your regular paycheck was cut nearly in half? How would you make ends meet?
Of course, your compensation at work, tax bracket and needs are different from John’s; so are the specifics of your group disability plan. But keep in mind, if your take-home pay includes bonuses and/or commissions or if your salary exceeds your plan’s benefit cap, the percentage of replacement income your plan may provide could be even lower.
Perhaps you think you don’t need to worry about disability insurance. After all, you have access to worker’s compensation through your employer. But keep in mind, worker’s compensation provides benefits only if your injury or illness is job-related.
People tend to associate disability insurance with accidents. But the reality is, 70 percent1 of disabilities are caused by heart-related issues, stroke, cancer, back problems and even maternity.
To help ensure you’d have enough money to maintain a similar lifestyle, consider supplementing your employer’s group disability plan with individual disability insurance coverage as a way to bridge the gap between what your employer may provide and what you need financially if you become disabled.
When used in addition to a group plan, individual disability insurance can provide significant benefits, including the ability to boost the amount of replacement income you’ll receive to 80 percent or more of your regular salary. That money is generally tax free, assuming you fund your policy with after-tax dollars.
What’s more, your individual policy is yours to keep as long as you continue to pay your premiums on time—even if you change employers or careers. This is in contrast to group disability insurance, which can be cancelled at any time by your employer and which ends once you leave the company.
Individual disability insurance may also provide greater flexibility than your group plan by giving you a choice of options, including the ability to increase your coverage as your earnings grow and/or to keep pace over time with the rising cost of living.
It’s easy to overlook individual disability insurance, especially if you have coverage at work. But remember, unless you have a plan to replace most of your lost income in the event of disability, you could end up draining your savings and cutting short your plans for your family’s future as well as your own. Individual disability insurance can help provide or enhance your income protection so that you can maintain your lifestyle and your financial goals should illness or injury prevent you from working. To learn more, contact a financial representative.
1 Based on Northwestern Mutual claims data 2008-2013.