The ‘Have and Have Not’ of Group Disability Insurance
By Todd Francis Johnson, Northwestern Mutual
If you are one of the lucky workers covered by an employer sponsored Group Long Term Disability Income (LTD) insurance policy, you are more fortunate than most. Even if you are covered, it is extremely important to make sure you are adequately protected. Becoming disabled due to accident or illness is a very real risk.
While the likelihoods vary with age, during your income producing years, you are nearly twice as likely to become disabled as you are to die before reaching age 65.1 Yet, few American workers are financially prepared to weather a disability. In fact, the Council for Disability Awareness reports that 65% of working Americans say they could not cover their normal living expenses for a year if their employment income was lost; 38% could not pay their bills for longer than three months.2
The question to ask yourself is whether your family could meet expenses for three or four months if the primary wage earner lost his or her income due to a disability. Given the current economic conditions, now would be an excellent time to review your assets and consider how long your family could make ends meet if the primary wage earner suffers from cancer, a heart attack, an accident, or some other disabling event.
Even if you have employer provided group LTD coverage, such coverage alone seldom provides families with enough benefits to meet all their financial obligations.
Limitations of Employer-Provided LTD policies
Here are some typical limitations of group LTD policies provided through an employer:
- Most group LTD policies only cover 60 percent of base salary, which leaves you to meet your financial obligations on a 40 percent drop in income.
- Typically, group LTD polices do not cover incentive compensation such as profit sharing contributions, deferred compensation or regular incentive bonuses.
- When the employer pays the premium for group LTD coverage, any benefits received are considered taxable income to the employee.
- Group LTD benefits are often reduced dollar for dollar with any Social Security benefits, workers compensation benefits, or auto no fault benefits received by the disabled employee.
- Group LTD policies often have low monthly benefit maximums which can reduce the amount of income replaced for higher paid employees. For example, if the group LTD policy replaces 60% of salary with a maximum monthly benefit of $5,000, anyone making more than $100,000 per year receives less than 60% when faced with a disability.
Calculating Your Income Post Disability
Clearly, everyone who relies on a paycheck needs to assess how long he or she could continue to meet their financial obligations in the event of a disability, including any ongoing savings for education and retirement.
As a first step, it’s important to consult with an experienced financial professional. Look for someone who is both knowledgeable and trustworthy. Make sure the insurance company is reputable, and has financial strength and stability and commitment for the future.
A financial professional can help you assess whether you would have the financial resources to meet your obligations in the event of a disability and for how long. If additional disability income coverage is needed, he or she can advise what types of supplemental coverage would be appropriate. Underwriting rules by insurance companies often dictate how much coverage is available to an individual, but the wide variety of policies on the market today can suit many different income levels and budget requirements.
What’s most important is to have a solid, complete plan in place to get you through the “have not” periods of life.
- Society of Actuaries Individual Disability Experience Committee 1999 Preliminary Table, most recent update; Society of Actuaries 2001 Valuation Basic Table, most recent update.
- Disability Statistics, Council for Disability Awareness, March 2013.
- Social Security Administration, Disabled Worker Beneficiary Statistics, December 2012.
Article prepared by Northwestern Mutual with the cooperation of Todd Francis Johnson. Todd Francis Johnson is a financial representative with Northwestern Mutual, the marketing name for The Northwestern Mutual Life Insurance Company (NM), Milwaukee, Wisconsin, and its subsidiaries. Financial Representative is an agent of NM based in St George, UT. To contact Todd Francis Johnson, please call (435) 628-8248, e-mail at firstname.lastname@example.org or visit the Web site at toddjohnson-nm.com.