What is your most valuable asset? Your home? Your Car? Your Health? For most people, it is their income. Your income pays for both the big things in life – the mortgage, car, food, utilities, vacations – and life’s little things – children’s activities, movie tickets and cell phones. Most of us buy insurance to protect our home, car and health, but we ignore the most important asset which needs to be protected– OUR INCOME. Without your income, you cannot afford any of your basic needs. This article discusses disability insurance and why it is important.
Disability Insurance Is a Necessity for Any Person Earning an Income
If you were to become sick or hurt and unable to work, how would you continue paying for the place you call home? Or for the car your drive?
Disability Insurance can protect your mortgage and car payments by providing you an income if you are sick or hurt and unable to work. Even if you don’t own a home, it provides you an income to cover your daily living expenses. Americans spend more than $250 a month on the latest technology and dining out. Yet, those same individuals haven’t taken the important step of buying disability insurance because they perceive it to be “too expensive.” The average cost of an individual disability policy is 1.5% to 3% of your income to protect about 55-65% of your income on a TAX-FREE basis.
Group Versus Individual Plans
You may have group LTD (Long Term Disability) or STD (Short Term Disability) coverage at work paid for by your employer, but most employees are not aware of the limitations of the group coverage or the amount of coverage they have. Your group LTD coverage is not portable (meaning you can’t take it with you if you leave your job) and if your employer pays the premiums, your benefit becomes taxable.
Typically, a group LTD policy covers you for 50-60% of your base salary with a monthly cap somewhere between of $5,000 to $10,000 per month depending on your company and occupation. If you have a base salary of $100,000 and your employer is providing you with LTD at 60% of your base salary, your disability benefit will be $5,000 per month. Since the employer pays the premiums, you will be taxed on that benefit. Instead of $5,000, you will actually take home about $3,500 – $4,000 per month after taxes (depending on your tax rate). Can you survive on 40% of your paycheck?
Commission Based Employees
If you are a commission based employee, a high income earner or a partner with a significant portion of your compensation paid to you as a bonus, you can be severely affected by a group LTD plan because it only covers a percentage of your base salary up to a set monthly cap. Bonuses, commissions, etc., are not covered in a typical Group LTD plan. They ARE covered in a individual long term disability policy. If you are a high income earner (or commission or bonus based income earner) you should consider supplementing your group coverage with an individual Long Term Disability insurance policy.
Benefits of Individual Disability Insurance
With an Individual Disability Insurance policy, benefits are not taxable (when premiums are paid with after-tax dollars) and can be purchased in addition to any group disability coverage you have. Disability policies provide a benefit if you are “unable to perform the duties of your occupation due to sickness or injury”. Policy definitions are different for each insurance company, so shop wisely or use an independent broker who can provide you quotes to compare from at least 4 companies. Each insurance company offers different features/riders which can be added to a policy. These features/riders vary based on age, income, occupation, etc. Some of the important riders to consider are “Own Occupation”, “Residual Disability”, “Inflation (Cost of living)” and “Catastrophic”. Your broker/agent can provide you with detailed information on the riders.
How much do you spend on technology and dining out each month? How long could you make it if you could no longer afford your lifestyle because an unexpected illness or injury made it impossible to work? Spending around 2.5% of your income to protect about 55% of your income is a small price to pay. This information on individual disability insurance and why it is importantwas prepared by PKA Insurance.