It’s almost time for open enrollment season, which means you’ll have the chance to sign up for workplace benefits your employer offers or make adjustments to the ones you’re already receiving.
Chances are, you’ll pay the most attention to the health, dental and vision insurance plans that are available. You might take a look at the group life insurance benefits that are offered and decide how much to contribute to your retirement account during the coming year. Beyond that, you make not spend much time reviewing your options – which could be a mistake. You might overlook some valuable benefits, such as disability insurance.
The 2019 employee benefits survey by the Society for Human Resource Management found that 71% of employers offer long-term disability insurance and 61% offer short-term disability insurance. Yet, a majority of private-sector employees do not have this coverage, according to the Social Security Administration.
If your employer offers this benefit, you might be asking, “Why do I need disability insurance?” To answer that, consider this question: If an injury or illness left you unable to work, how would you pay your bills?
Disability income insurance protects a portion of your income should you become too sick or injured to work. “Your income is the most valuable thing you have,” says Bill Olmstead, a disability insurance specialist and vice president at the Financial Balance Group in Rockville, Maryland. “It should be protected before anything else.”
However, people tend to overlook this insurance because they can’t see themselves becoming disabled, Olmstead explains. Unfortunately, the chances that an injury or illness will leave you unable to work are pretty high. More than 1 in 4 of today’s 20-year-olds will become disabled before reaching age 67, according to the Social Security Administration.
If you’re ready to look more closely at disability insurance this open enrollment season, here are the questions you need to ask when getting this coverage through an employer.
What are the benefits of getting disability insurance through an employer?
The most significant benefit of getting disability insurance through an employer is that it’s less expensive than getting individual coverage, Olmstead explains. In fact, some employers offer this benefit at no cost to employees.
If your employer has a group disability plan that is offered to all employees at no cost, you will automatically qualify for coverage without having to answer any questions about your health or having to take any medical tests, according to Life Happens, a nonprofit organization that educates consumers about insurance. Even if you have to pay for disability insurance offered by an employer, the cost can be up to 20% less than individual coverage. And qualifying for coverage can be easier.
What sort of coverage does your employer’s disability plan offer?
Disability insurance will replace a percentage of your income if an injury or illness leaves you unable to work and you have to file a claim. It’s important to find out what the benefit level of your employer’s plan is.
Typically, group disability insurance will replace 60% of income, Olmstead says. So if you’re making $100,000, your disability benefit would be $60,000.
Is there a cap on benefits?
Disability insurance plans usually replace a percentage of income up to a maximum amount. For example, the policy might replace 60% of your income up to a maximum of $5,000 a month. If you have a high income, the cap might limit the percentage of your income that actually is replaced.
The cap amounts tend to be higher at large companies where salaries can be higher, Olmstead says. At small companies, the caps tend to be lower. If your income is high, check with your employer to see if it offers supplemental coverage you can buy to get a higher benefit cap, or you might want to consider an individual disability income insurance policy.
How long is the benefit period?
The benefit period is the length of time the insurer will pay you disability benefits while you are disabled. The length of the benefit depends on the type of coverage your employer offers. Your employer might provide group short-term disability insurance, long-term or both.
Short-term disability coverage typically pays benefits for three to six months. Some will pay benefits for up to a year, “but they are few and far between,” Olmstead says. Long-term disability insurance usually will pay benefits until you’re 65. However, if you’re still working at age 65 and become disabled, plans typically will pay benefits for a couple of years.
Is there a waiting period before benefits are paid?
Disability insurance plans have elimination periods that require you to wait a certain number of days before you can start receiving benefits after you file a claim. These periods usually range from 30 days to six months, according to Life Happens. If you have to pay the premiums for coverage, opting for a longer elimination period can reduce the cost.
What is the insurance plan’s definition of disability?
To qualify for benefits if you file a claim, you’ll have to meet your insurance plan’s definition of disabled. The key language to pay attention to is whether the plan considers you disabled if you can’t perform the duties of your own job or any job.
Typically, group disability insurance will pay you if you can’t do the duties of your own occupation during the first 24 months after becoming disabled. Then it will pay after 24 months if you can’t do the duties of any occupation based on your education, training and experience, Olmstead says.
The more generous policy is one that pays if you can’t perform the duties of your own occupation. For example, if you are a surgeon and injure your hands, you want a policy that pays if you can no longer perform surgery. Otherwise, you might have to settle for a lower-paying job if you have a plan that only pays if you can’t perform the duties of any job.
Does the plan cover partial disability?
Most disability claims are for illnesses, not accidents, Olmstead explains. So you want to find out whether your employer’s disability plan will cover partial disability – that is, an illness or injury that allows you to work but not full-time. “Most plans do cover partial disability to some degree,” Olmstead says.
Can you keep your coverage if you leave your job?
One of the big drawbacks of group disability insurance is that you typically can’t keep your coverage if you leave your job. However, some employers offer the option to convert group coverage to individual coverage if you leave your job, Olmstead says.
Group coverage that’s converted to individual coverage typically doesn’t provide the same level of benefits you could get if you had bought a policy on your own, Olmstead explains. But it might be your only option if you have medical conditions that prevent you from qualifying from individual disability insurance.
Is additional coverage available?
Your employer might offer a base level of disability coverage at no cost to you and offer supplemental coverage that you could pay for through paycheck deductions. When your employer pays for the cost of your coverage, the benefits you receive if you file a claim will be subject to income taxes, Olmstead says. If you pay the cost of your coverage, your benefits will be tax-free.
To reduce the tax bite on your benefits, you might want to opt for the minimum benefit your employer offers at no cost to you, then opt for supplemental coverage that you’ll have to pay for or an individual policy.
Do you need individual coverage in addition to group disability insurance?
The answers to the questions above will help you determine whether you should buy your own disability insurance in addition to what your employer offers. It also depends on your current financial situation, Olmstead explains.
If you’re just starting out, you might not have excess cash flow to buy an individual policy if your employer’s plan has gaps. But Olmstead says that if you have a high income and couldn’t live on the payout you’d get from your group plan, you should consider looking at supplementing your coverage with an individual policy.
“The most flexible and reliable source of coverage is an individual disability insurance policy that you purchase on your own,” says Faisa Stafford, president and CFO of Life Happens. “A privately owned policy is portable, meaning you won’t have to worry about losing coverage if you change jobs. Plus, when you pay the premium with after-tax dollars, benefits are received income tax-free.”
You can find out how much coverage you need with Life Happen’s free disability insurance calculator.
Cameron Huddleston is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. She also is an award-winning journalist who has been writing about personal finance for more than 17 years. You can learn more about her at CameronHuddleston.com. Opinions are those of the author or the person interviewed.
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