How to Evaluate your Disability Insurance [video]
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Disability insurance protects you against loss of income if you have an injury, illness, or a condition that prevents you from working. If you get hit by a car, for example, and you cannot go back to work, this coverage will kick in. I do ask people to send me their policies during the planning process and many times they don't really know exactly what to send me or they'll send me something from their work portal that says 60% and that's it. So here's what I'm looking for and what you should be evaluating at a bare minimum to understand your coverage.
Determine your benefit amount.
So this is the amount of coverage that you actually have and it can be listed in percentage or dollar form. Sometimes it will say something like it's 60% benefits up until a max of a dollar amount per month or per week. If that's the case, you do want to calculate if you're hitting the max and if you are, what is the actual percentage because it may be less than 60%. We will need that when we do our evaluation to determine if you have sufficient coverage.
Determine the definition of disability for your policy.
It may say that you're covered for your own occupation or any occupation. This is really important, especially if you have a highly specialized skill, like a surgeon. If you are unable to do surgery due to an accident, but you can still do paperwork or you can still lecture, the policy that you have may not pay out depending on the definition of disability that is written there, and that will be a substantial reduction in your income.
The elimination period or the day that benefits begin.
This is really important for us to know so that we have a sufficient cash reserve to cover that gap for you while you're waiting for your benefits.
What's the duration? How long do benefits last?
That may be listed in weeks, months, years, or until SSNRA. What's that? Social Security Normal Retirement Age or your Full Retirement Age. That's going to be listed on your Social Security Statement.
You want to be clear on the taxation of your benefits.
If your employer is paying the premiums for the policy, the benefits will come out taxable. If you're paying the premiums, it will be tax free. I'm also seeing more often that your employer is giving you the option if you want to pay the premiums or if you want them to pay them. So that's interesting.
If you don't have enough coverage or any coverage through your employer, you still have options. You can look at a private policy.
They do tend to be more expensive. However, one thing that you can try is to find a professional organization that you're part of. For example, for me, that would be the Financial Planning Association, because many times they do group people together and get a group rate. So you may be able to find a policy there that is more affordable than just going out on your own.
This is a general overview, but of course, things can get a lot more complicated with cost of living adjustments, riders, and coordination with other benefits. Get personalized advice if you have any questions. My name is Linda Rogers, Owner of Planning Within Reach.
Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.
Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.