Imagine that you are running your business and life is good – you have a loyal client base, sales have been increasing steadily for years, and you are supporting your family with your dream business. (For those employed: Imagine after years of hard work, late nights, and climbing the corporate ladder, you now have the title and salary that most people only dream about.) Now…imagine what would happen if one car accident changes your ability to do the physical and mental requirements needed to run your business and perform your job. If you could no longer work, what would happen to your financial future? Have you created the best system of financial tools, including disability insurance, to protect and minimize the financial impact of becoming disabled?
When making decisions about insurance needs and coverage, many of us don’t question the need for health and dental insurance. We understand the need to get sufficient coverage based on our personal health history, risk tolerance, and medical bills showing total cost versus patient out-of-pocket cost. However, one type of insurance that isn’t as well understood is disability insurance. If you become disabled due to an injury, illness, or accident and are unable to go to work, disability insurance provides income replacement. If you are a small business owner, purchasing a private disability policy is extremely important to cover overhead expenses and living expenses in the event that you become so disabled that you can’t run your business. If you play a key role in the day-to-day duties of operating your business and generating income, one accident leaving you disabled can have a significant impact on both your business and personal finances. On the other hand, if you are employed, many companies provide short-term and long-term disability insurance at no charge. This may sound like a great perk, but almost everyone needs to purchase a private policy for additional coverage as they may be surprised to find out the following three factors:
#1 – Not Enough Income
If you receive disability insurance through your employer, you are likely only covered at 60% of your current income. Given that many people live paycheck to paycheck, getting only 60% of current pay (which may be taxed) would not cover the bills! Furthermore, how many of you would leave your current employer and take a job that only pays 60% of your income?? If you can’t support your current lifestyle and family on anything less than your current income, then you need to purchase additional coverage through a private policy.
#2 – Benefit is Taxed
If your employer covers the insurance but doesn’t tax you on the value of the premium, any benefit that you receive would be taxed. What’s wrong with that? This means that you would get less than 60% of your current income, if your benefits are taxable.
#3 – Any Occupation Rule
This was a huge eye-opener for me when I learned that most disability insurance policies offered by employers apply the any occupation rule. What does this mean? If you have a highly specialized career and work as a dentist, lawyer, CPA, etc. it does not matter that you are disabled and could no longer work that type of job. As long as you could work at any job, such as a Walmart greeter, fast food worker, or mall security guard, you would not quality as being disabled to continue benefits!?! Therefore, your lifestyle would have to be drastically reduced or you could risk going bankrupt if your new income did not cover your basic expenses.
Small business owners may put off buying disability insurance because they can’t afford it, are healthy, and believe that they can always find work in some capacity. Employees may be making the same mistake that I did when I worked in corporate and think that they have sufficient disability coverage through work. I would have loved to have been given detailed examples and graphs that explained the timing and gaps in short-term and long-term coverage as provided by fee-only certified financial planner fiduciary, Jon Luskin, in his personal financial planning blog post “Personal Finance – Why You Need an Emergency Fund.”
I want to share a few real-life examples where people didn’t account for accidents and illness, and didn’t have sufficient coverage:
- Employee who was not allowed to lift over 60 lbs – Jon Luskin, a fee-only certified financial planner fiduciary at the independent firm Define Financial, shared that he knew an employee, let’s call him Sam, who had disability insurance from his employer but did not have a private policy. Sam needed surgery and took time off from work. His employer paid him while he was recovering from surgery, but when his doctor wrote a note stating that he was healthy and could go back to work, as long as he didn’t lift anything over 60 lbs, his workplace benefit stopped. The bad news is that Sam’s job requires him to lift over 60 lbs, so he actually couldn’t go back to work. Now, he is not working and NOT receiving income replacement. If he had bought a private insurance policy with an own occupation definition, he would still receive benefits because he couldn’t do his current occupation.
- Paralyzed while playing with son’s skateboard – A Raleigh financial advisor shared a story where a prospective client, let’s call him Dave, declined buying disability insurance. Dave was an attorney and felt that he could always practice law in some capacity as long as he was mentally healthy. A year after making the decision to not get coverage, Dave was showing his son how to use a skateboard and broke his neck, leaving him paralyzed. Dave and his family lost everything.
- Hit by tram going to work – Jessica Garbarino, Owner of Every Single Dollar, shared that she learned what disability insurance through an employer would actually cover when one of her co-workers, let’s call her Shelly, was hit by a tram while riding her bike to work. Shelly eventually recovered, but had permanent brain damage. Jessica learned a valuable lesson that motivated her to get her own private policy to get adequate coverage because “Sadly, from a financial standpoint, dying wouldn’t cause a financial hardship as I have assets to cover final costs. It’s being severely injured and not being able to produce an income that would cause a much greater hardship.”
- Dentist who developed hand tremor – I personally knew a dentist who was very active in outdoor recreation, but slowly developed a hand tremor. He was forced into early retirement when it got progressively worse and prevented him from performing more than the typical dental cleaning.
Great, now that you know there may be gaps in your disability coverage and you’ve read these real-life stories, what should you do?
Recommended Action Steps:
- Seek out an insurance agent, broker, or financial advisor to help you shop around for a private policy. Find someone who has the heart of a teacher, who will understand and educate you on how to make the best outcome for your financial picture. Or conduct research on your own at Policy Genius and compare quotes from multiple companies. To get smart on terminology and different options, check out the personal financial planning blog for Deloitte employees at UncleDmoney.com by Jon Luskin, a fee-only certified financial planner fiduciary at the independent firm Define Financial. It is packed with definitions and examples that can help you better understand what options to consider.
- Get a policy with own occupation disability. Meaning, “you wouldn’t have to prove that you are unable to work in any capacity, but only within your own field.” This allows you receive benefits and buys you time to get training and education as needed to obtain work in a completely different field.
- Look to get a policy that will keep up with your income, especially if you are early in your career and expect your salary to continue increasing. Check out this blog post with a great example comparing two employees at different levels in the company, showing why it’s so important to properly insure your future income based on age and earning potential.
- Consider adding in a cost-of-living option adjustment since typically, cost of living is always increasing and you want the benefits to cover your current expenses.
- Determine if you need retirement protection beyond the typical age of retirement. Since many people choose to work past retirement age, you may want a rider added to your policy to allow for your plan to continue.
- When ready to apply, be prepared to submit tax return, W2s, and medical records, as well as undergo a physical, including height, weight, blood pressure, pulse, urine specimen, and blood test. If you recently applied for other insurance, such as life insurance, sometimes the same medical test results can be used depending on timing.
Many of us don’t like to think about worst case scenarios, but becoming severely injured or sick can often lead to a much greater financial burden than we realize. Getting your own private policy, even if you have benefits through your current employer, is highly recommended for the reasons and stories provided. As Jessica Garbarino, owner of Every Single Dollar shares, “I like the ability to have options and to be able to have the same plan no matter which employer I was with.” Be proactive and in control of your financial future, protecting and minimizing the financial impact for health and situational risks that may not be in your control.
Did anything in this post surprise you? Do you have a story to share where someone you know became disabled and didn’t have adequate coverage? If so, please share as I believe that real-life stories are what motivates us to make changes.