WHAT IS DISABILITY INCOME INSURANCE?
• ARE EMPLOYEES COVERED BY GROUP DISABILITY BENEFITS?
• WHAT ABOUT SOCIAL SECURITY DISABILITY BENEFITS?
WHAT IS DISABILITY INCOME INSURANCE?
Disability income insurance provides the insured with income when he/she becomessick or injured and unable to work. It helps protect against family financial catastrophe
by giving you an income to meet daily expenses.
Disability income insurance is one of the most undersold and overlooked markets in the
insurance business. From the surveys, which are taken from time to time, it has been
found that 85% of workers surveyed in companies that employ 3 to 50 employees, have
NO SHORT TERM OR LONG TERM DISABILITY. It has been said that 97 out of 100
American families would be bankrupt if they missed just THREE PAYCHECKS!
Disability income insurance comes in two major forms:
A variety of employer-paid and government sponsored programs, generally
cost-free to the recipient, covering certain categories of workers.
Private policies (paid for by individuals) that protect income when there are no
applicable employer or government programs or when those programs do not
adequately meet income needs.
As with all insurance, disability income insurance operates on the principle that many
people pool small sums of money to benefit those who need help. The beneficiaries are
people who need adequate income should they become disabled.
ARE YOU COVERED BY GROUP DISABILITY BENEFITS?
First, find out exactly what benefits your employer offers in the event of a disabling
illness or injury. Most employers allow some short-term sick leave, which may last from
a few days to as much as six months, depending both on employer policy and on
duration of employment. In some states (for example, Hawaii, New Jersey, New York,
and Rhode Island), state law requires most employers to provide disability benefits for
up to 26 weeks. In California, most employers must provide coverage for up to 52
weeks.
No laws require employers to offer long-term disability (LTD) insurance, but it is
estimated that almost half of mid-size to large employers provide long-term benefits for
at least five years. Typical group long-term disability benefits replace about 60 percent
of salary, start when short-term benefits are exhausted, and continue anywhere from
five years to life. Often, group long-term insurance is fully paid for by employers without
contributions by employees. (That’s why employer-paid disability income benefits are
subject to income tax.)
Check with your employer’s benefits office to see if you are covered and, if so, what is
available to you. Find out how long you must wait before benefits begin and how long
payments will continue during your disability. Find out, too, whether your employer’s
plan takes other disability coverage (such as government programs) into account when
calculating your long-term disability pay. Ask for a booklet describing the disability
coverage your company offers.
WHAT ABOUT SOCIAL SECURITY DISABILITY BENEFITS?
Social SecurityMost salaried workers in the United States participate in the federal government’s Social
Security program. Social Security is best known for its retirement benefits. But the
Social Security Administration (SSA) also administers disability benefits. In March of
1999, 4.2 billion dollars in Social Security disability payments were sent to 7.2 million
Americans.
Your salary and the number of years you have been covered under Social Security
determine how much you can receive. In March of 1999, the average monthly payment
for a disabled worker was $733.
Eligibility
Eligibility is based on being unable to perform any gainful employment, not just the jobyou were performing at the time the disability began.
Individuals are eligible for benefits after you have been disabled for 5 months and if the
disability is expected to last 12 months or to result in death. Claim processing may take
up to 3 months, so file as soon as possible.
Social Security Payments
Social Security payments may be reduced by disability entitlements under other
government programs. Why? Because total combined payments under Social Security,
workers’ compensation, civil service, and military programs generally cannot exceed 80
percent of average pre-disability earnings. A government pension also may reduce
Social Security disability payments.
Social Security disability payments are subject to federal income tax, if your "combined
income", adjusted gross income plus any nontaxable interest income and half of your
Social Security benefits exceeds certain limits.
Example
If you file an individual tax return, you may have to pay income tax on 50percent of your Social Security disability payments if your combined income is
between $25,000 and $34,000.
If your combined income is greater than $34,000, then 85 percent of your
benefit payments are subject to income tax.
If you file a joint tax return, and your combined income is between $32,000
and $44,000, then you may have to pay taxes on 50 percent of your Social
Security disability benefits.
If your combined income exceeds $44,000, then 85 percent of your benefit
payments are subject to income tax.
Social Security disability payments can be an important part of your income should you
suffer a disabling illness or injury. Contact your local Social Security Administration
office for an estimate of the disability benefits to which you would be entitled.
Qualifying for Medicare
After 24 months of benefits, recipients qualify for Medicare. If you want the medical
insurance portion of Medicare, in addition to hospital coverage, you must enroll and pay
a monthly premium.
ARE YOU ELIGIBLE FOR OTHER DISABILITY INCOME?
Other Potential Sources of IncomeThere are many other potential sources of income if you become disabled:
Workers’ compensation benefits, if you suffer an accident at work or an illness that
results from your employment.
Veterans Administration pension disability benefits, for eligible veterans.
Civil service disability pay, for federal or state government workers.
Black lung program for miners.
State vocational rehabilitation programs.
Group union disability coverage.
Automobile insurance, if disability results from an auto accident.
Private insurance, such as credit disability insurance, that makes monthly loan
payments when you are disabled.
Supplemental Security Income (SSI) for persons with low incomes and limited
assets.
Medicaid, also for persons with low incomes and limited assets.
Availability of Other Programs
The availability and extent of these and other programs vary widely. But, because oneor more may be an important source of income should you become disabled, it’s
important to determine whether you are eligible. If you are, you should also find out how
long benefits will be paid. And, of course, your own resources- the savings you’ve put
aside over the years- are another valuable source of income.
HOW MUCH DISABILITY INCOME WILL YOU NEED?
Calculation of Disability IncomeAdd up all the benefits you are entitled to under the public and private programs
mentioned, along with the monthly income you could count on from other sources such
as your savings. If the total approaches your required income after taxes, you can
assume that, should total disability strike, you would be able to pay your day-to-day bills
while recuperating.
Important Points
You must remember that eligibility for Social Security disability benefits is
contingent upon your disability being expected to last for at least 12 months or
lead to your death.
If the total from employer benefits, Social Security, and other programs along
with your own resources will not be close to your pre-disability, after-tax income
and will not be adequate to support your family, you will want to consider buying
additional disability income insurance to make up the difference.
The amount of long-term disability benefits you may receive through your employer’s
group plan or your personal insurance benefits may be reduced by the amount of Social
Security or other government benefits that may be paid.
A special note for employers
If you are your own employer, consider a group policy for you and your employees. If
you are a sole practitioner, or if you work for a business that does not provide benefits
under a group policy, an individual policy is a good idea. After all, if you do not receive
benefits, your entire business may suffer.
An agent can be helpful
Whether you are an employee or an employer, your insurance agent can help analyze
your sources of disability income, determine waiting periods for various benefits, and
determine whether additional coverage would be wise.
Elimination and Benefit Periods
The Elimination Period is the period in which the insured, in the event of a total
disability, is able to continue his/her present standard of living, before the insurance
company begins making payments.
Elimination periods are available in 14-day, 30-day, 60-day, 90-day, 180-day and 365-
day time frames.
The formula is the same:
The longer the elimination period, the lower the insurance cost. Therefore in making this decision, the insured will have to make an accurate
assessment of the liquidity at hand, other sources of revenue, income from
spouse, investments etc.
Concurrently, a fixed expense schedule will help in determining cash flow
available, and for how long.
The Benefit period is the duration for which an insured is paid disability income. Typical
benefit periods are one year through five years, age 65 and lifetime. The kind of benefit
period that best suits an individual would vary from occupation to occupation.
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