How to Evaluate Employer Benefits Packages (Part 6): Disability
In the last article, we talked about Life Insurance as a gift you leave your family members. Disability Insurance is a gift for you and your family. Life Insurance helps replace your income stream for your family, Disability helps you maintain an income stream in the event you have an illness or injury that prevents you from being able to work.
Who Needs Disability Insurance?
What would happen if you were unable to work and bring home your regular paycheck for several weeks, months or even years? If the answer is, “I would struggle to pay my bills or buy groceries,” then you need Disability Insurance. This benefit is designed to replace half to two-thirds of your regular earnings depending on the plan. There are several reasons why it only covers part of your earnings:
- If you’re not working, you’re probably not incurring as many expenses from things like commuting and purchasing or cleaning work clothes/uniforms.
- A percentage of your income usually goes to pay taxes, but depending on how your disability insurance premiums are paid, you may not need to pay taxes on the disability benefit payments you receive.
- Your employer and the disability insurance carrier want to make sure you’re motivated to recover and return to work as quickly as possible. Disability benefits have been described as a “safety net, not a hammock,” meaning that they should sustain you, but not become such a comfortable place that you want to hang out there for a long time.
Short-Term Disability Covers Periods up to 13-26 Weeks
Short-term disability typically covers periods of 13 to 26 weeks. Although not technically a disability, pregnancy may result in the inability to work and is included in short-term disability coverage. Short-term disability also kicks in when you have an accident, complicated illness, or other ailment that requires more than a few days away from work, but from which you will likely recover within a few weeks or months.
Long-term Disability Can Range from Two Years to Retirement
Long-term disability picks up at the end of the short-term disability coverage period and can provide benefits ranging from two years to retirement depending on the plan. Unfortunately, during this longer period, your employer’s leave of absence policy could result in termination of your employment resulting in the loss of other benefits. But if you have long-term disability coverage, you will continue to receive those long-term disability benefit payments even after your employment has ended.
What to Look for When Comparing Employer Disability Plans
When evaluating this benefit from employers the variables typically consist of the contribution amount you pay for coverage; the duration of the benefit; and the amount of benefit paid if you have a claim (usually expressed as a percent of your regular wages).
With some plans that provide a shorter duration or lower benefit percent you may have the option of “buying up” the coverage amount and/or the duration period.
Some plans may be voluntary, meaning that you will have to pay for some, or all, of the premium amount. In these cases, the amount you pay will be related to the amount of benefit and your level of risk. Those that have a higher income to be replaced or are older, and therefore at higher risk, will pay more.
It is a good idea to determine if your new employer’s policy has any pre-existing condition exclusions that might impact you. For example, if you have a chronic health issue for which you have already been diagnosed and are receiving treatment you may not be eligible for disability benefits for that specific condition for up to 12-months after coming onto a new employer’s disability plan. Pregnancy is one of the most common pre-existing conditions.
It is also important to remember that Disability coverage through an employer only covers you as the employee. Your spouse is not eligible. However, they may be eligible under a disability plan provided by their employer.
Do You Need an Additional Personal Disability Policy?
Depending on the type of work you do, your family situation and financial responsibilities, it might be a good idea to consider a policy to supplement what your employer provides. An individual policy can be attractive, especially if you are able to permanently lock in low rates while at a young and healthy age. You may want to take out a personal policy if:
- You are planning on changing jobs and want to bridge your disability coverage until the new employer’s plan comes into effect. (There’s often a benefit-eligibility waiting period.)
- You want to make up for the 40% of lost income that your employer-provided disability benefit doesn’t cover
- You need extra income in case you’re permanently disabled and need help caring for your children or performing household duties
- You want to be able to fund your retirement so you have something to live off once your long-term disability benefits have ended
A trusted financial advisor can help you determine if this is something that you should consider.
Next Week: Other Benefits
We have spent the recent posts talking about the “Big 5” employee benefits. Next week we will do a review of some of the other types of benefits employers provide, like Dental, Vision, Wellness, and other voluntary benefits like Critical Illness and pet insurance.
Written by Brian Mitchell
Brian Mitchell has experience leading Total Rewards strategy and implementation for large employers. He enjoyed helping his own millennial children navigate first-time employment and benefit selections. He hopes his insights simplify the process for you as well.
Benefit Boosts by Brian Mitchell© – Vol 2024-007
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