Managing Long-Term Disability Risk: Part Three
By Greer Gibson Bacon, CFP®
This is the final part of a series on this topic. Review the September-October 2018 issue of The Message for basic information on your long-term disability risk and government benefits. Review the November-December 2018 issue for key concepts that will help you maximize your group and individual coverage.
Government benefits, like Social Security and worker's compensation, may provide basic benefits if you suffer long-term disability. It is important to understand you may not qualify for them and they may be woefully inadequate. This makes group and individual long-term essential.
Group long-term disability insurance may be offered by your employer or an organization to which you belong, like a professional association. It is valuable coverage especially since it may be offered without "proof of insurability". That said; it may not be adequate on a stand-alone basis for several reasons.
- Most policies use a "modified own occupation" definition of disability for two years and an "any occupation" definition thereafter. Some limit coverage for certain disabilities, like mental conditions or substance abuse, or may pay limited or no partial or residual disability benefits. While this may be sufficient for rank and file employees, it is not sufficient for professional practitioners.
- Most policies cover 60% of base salary with a maximum monthly benefit of $5,000 or $10,000. For highly-compensated employees, this leaves a substantial coverage gap. For example, if your monthly salary is $20,000 and your 60% benefit is capped at $10,000, the group coverage will replace only 50% of your monthly salary.
- Most premiums are employer-paid. So, benefits collected by a disabled employee are 100% taxable. So, using our example (above) and applying a 24% tax rate, you would keep only $7,600 of your monthly benefit after paying income taxes, thus reducing the replacement rate to only 38%.
- Most policies do not offer inflation protection. This has minimal impact for professional practitioners close to retirement with substantial retirement savings. But, it can have a crushing impact for younger professionals who are just beginning their careers and have little retirement savings especially if they have substantial student loan debt. Remember... the cost-of-living doubles every 24 years assuming 3% annual inflation.
- Most policies are not portable. So, your coverage is lost if your employment ends. This may be a major factor in deciding whether or not to change employers if the new employer does not offer long-term disability coverage especially if you are older or in poor health.
Given the limitations of government and group coverages, individual long-term disability insurance is vital for most professional practitioners. Although it can be a significant budget item, it can be tailored to your financial needs. And without it, your family financial plan can be completely devastated by a disabling illness or accident.