“Now listen, you who say, “Today or tomorrow we will go to this or that city, spend a year there, carry on business and make money.” Why, you do not even know what will happen tomorrow. What is your life? You are a mist that appears for a little while and then vanishes.” (James 4:13-14)
It’s probably not true in the latter half of this decade, but in most years, Disability is the biggest cause of home foreclosure. It wrecks lives. How long could you go if your income stopped today? Most people cannot go very long.
Some people believe that Social Security will take care of them if they are disabled. They’re wrong. Although there is a disability component to Social Security that could potentially kick in, they have a very stringent definition and in most cases of disability, they do not pay you.
A disability in the family can sometimes mean increased expenses and always means a decrease in income. Let’s look at some common problems with disability insurance.
If you work for a large corporation, there’s a good chance that you have group disability insurance. We usually see plans that pay out somewhere between 60 and 66.67% of your current income. To some, that’s already a problem. Even if that seems ok, it’s important that you understand the taxation of disability insurance.
The government gets their taxes one way or the other. They either tax the dollars that are used to pay for the insurance, or they tax the benefit stream. If your company is paying for your disability insurance, you can be sure that they are deducting this benefit from their taxes, which means your benefit would be taxable. In many cases this would mean that the real disability benefit is at or below half of your current income. Your benefit is not taxable if you are paying for your benefit. Most employees don’t have a choice in this matter (other than to add to or replace existing group coverage). On the other hand, if you’re a business owner, you should keep this in mind when your accountant is advising that you can deduct your insurance premium expense. That could be a costly decision!
You can buy your own disability insurance, either as standalone coverage or as coverage supplemental to your group policy, but you might be surprised to learn that you cannot get 100% income coverage. As always, the insurance company does not want you to have a financial incentive to claim (or continue claiming) the benefit, so they will only offer up to around 80% coverage.
Typically, private disability insurance bought from a good quality company offers much stronger benefits than a group policy, so they cover scenarios such as being “too stressed to work” so long as they are medically verified. Because the benefits are strong, they leave room for abuse so the companies maintain that economic incentive for the insured to return to work. They will also rate specific industries differently (or not at all) based upon their experience insuring people in those industries.
Disability insurance seems to have more riders and provisions than any other type of insurance, but we’ll leave that for more direct questions.
Again, if you have specific questions about this complicated subject – please post them as a comment. I’ll answer.
Photo credit: Sybren A. Stuvel