If you’re hurt, or sick, who pays your salary? Many of us have some kind of short or long term disability plan at work, but have we really thought through what it might mean to be “out” for an extended period of time?
Employment-based plans are, of course, convenient and often reasonably priced. Short term policies generally have very liberal definitions of what “disabled” means (pretty much anything more serious than a broken fingernail), but only pay you for a limited period of time (hence “short term”). Long term plans are more stringent (short of a coma, but not by much), but will often pay for two years or more (typical plans pay to age 65, for example).
If you pay the premium yourself, the benefits are generally free of income tax, which is a real plus. On the other hand, employer subsidies help bring down the net cost, although this renders any benefits subject to taxes.
There are two major drawbacks to group-based plans, however: for one thing, they’re generally not “portable;” that is, they are part of the group benefits package, and you can’t take them with you if you leave (and they are not subject to COBRA). The other problem is that “one size fits all” planning seldom yields the best results for individuals. You may need (or want) specific benefits, but these plans are not flexible, so few (if any) options are available.
So what’s the solution?
Disability income, or “paycheck insurance,” policies are available, and can be custom-tailored to each person’s needs. According to a recent study by Guardian Life, though, most of us have an exaggerated idea of how much such plans actually cost.
According to the survey, about a third of us admit that we don’t have enough disability coverage. But there’s little understanding of how much that coverage really costs: about a third of the 1000+ respondents thought adequate coverage would cost up to 10% of their income. More disturbing, however, was that about a fourth said they were unwilling to spend any amount to insure their income.
When I’m talking to clients about disability coverage, I often use this approach: Mr Jones, your new employer has offered you two different wage packages. The first pays you $100,000 a year, as long as you’re actively at work. But if you’re out for a while, because of an accident or serious illness, you’ll receive nothing. The other option pays you $98,000 a year if you’re at work, but will also pay you $70,000 if you’re too sick or injured to come in. Which one would you prefer?
That 2% ($2,000), by the way, is not some arbitrary figure: it’s the typical cost of individually-owned disability insurance.
Henry Stern, LUTCF is an independent insurance agent in Dayton, OH. A licensed Continuing Education instructor for Ohio and Kentucky, he has well over 20 years of experience in “the biz.” He blogs every day (or so it seems) at InsureBlog.