Posted : 10/20/2011
About one in four 20-year-olds will become disabled and unable to work for at least three months sometime before they retire, the Council for Disability Awareness says.
Scary? Sure. But hey, you've got group disability insurance through an employer, so there's no need to worry, right?
Not so fast.
Although group disability insurance provides some protection, it may fall short of meeting your needs if you become disabled.
"The details become so critical at claim time," says Charles Matt, a financial adviser with Sapient Financial Group in San Antonio.
But few people actually take the time to read and understand what their disability policy covers when they start a new job. "Most people assume if the employer provides disability insurance, they have an adequate safety net," he says.
Unfortunately, that's often not the case. Here are five myths about group disability insurance that could give you a false sense of security.
Typically, a group disability insurance policy pays 60 percent of your income if you become disabled and can't work. That may sound like enough.
But if the employer pays the premium for the policy, the benefit is taxable. So you get 60 percent of income minus taxes, Matt says.
The amount of income is also generally capped at $5,000 a month, which may be less than 60 percent of your income, depending on your salary.
Finally, the 60 percent figure generally applies to base salary only, Matt says. Bonuses and commissions aren't counted in the equation — so that means a lot less disability compensation for workers who depend on those income sources.
The money paid out by the disability insurance policy isn't considered earned income.
"If I don't have earned income, I can't contribute to my 401(k) plan," Matt says.
That might not be a big deal for a few months. But what will happen to your retirement savings if you can't work for years?
Partial disability occurs when you can work, but not at full capacity. Some group policies may not cover partial disability. Or, they might pay benefits for a limited time period, such as six months, Matt says.
If the company has an unusual number of expensive claims, the insurer can decide to terminate the coverage or raise premiums. The employer can also decide to cut costs and discontinue the coverage as an employee benefit.
Think accidents cause most disabilities? Think again. Illness accounts for 95 percent of disability claims, according to the Council for Disability Awareness' "2011 Long-Term Disability Claims Review."
Musculoskeletal and connective tissue disorders, such as back and neck pain, are the leading cause of disability claims, accounting for 27.5 percent of claims. Cancer is the second leading cause, accounting for 14.6 percent of new disability claims.
To make sure you have a sufficient safety net in case of disability, review your group disability coverage to see how much income it would actually provide.
"A lot of times when I go through this with folks, they say, 'Oh my God, you've got to be kidding me,'" Matt says.
Consider other resources for a financial safety net, such as savings or a spouse's income. Be realistic. Barry Lundquist, president of the Council for Disability Awareness, says many people think they'll survive by relying on credit cards, workers' compensation, vacation time or Social Security.
But credit and vacation time will likely run out; the average disability claim is for 31.2 months. Workers' compensation covers only injuries that occur on the job, and the average Social Security Disability Insurance (SSDI) claim paid in 2010 was just $1,065 a month.
Next, tally your expenses, and be careful not to underestimate.
"People think if they did have some type of disability, their expenses would go down, but other expenses they haven't anticipated often go up," Lundquist says. "They think they can cut back more than they can."
Now ask yourself, would you have enough money to take care of your family?
If not, consider purchasing an individual disability insurance policy. Matt tells of one client in his 40s, an engineer, who fell off a ladder at home. He's had four neck surgeries and may have two more. His doctors say it will be at least three to five years before he returns to work. Fortunately, Matt says, the client has an individual disability policy – which includes a rider to make contributions toward retirement savings – to complement coverage from work. Otherwise, he'd be in financial trouble.
The Council for Disability Awareness offers a Financial Security Plan that lets you view the big financial picture and a Personal Disability Quotient to see your chance of experiencing a disability. Lundquist recommends talking to a financial adviser about whether you have sufficient resources and if you should buy individual disability insurance.
"The ability to earn income is the most important financial resource for virtually every working American," Lundquist says.
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