Disability Insurance Articles

Why Your Disability Insurance May Not Be Enough

2011-05-11

If you think you have financial security from your employer-sponsored disability insurance plan, think again. To keep disability insurance rates low, most plan benefits will only cover up to 60 percent of income. And for many, that is not enough to cover living expenses.

In addition, it is standard for disability insurance payouts to max out at $5,000 per month. This means that high earners may lose more than 40 percent of their income.

Other factors from your employer's disability insurance plan that may fall short depend on how your insurance benefits are defined. Some policies only pay if the employee cannot perform any job, while most employees expect payment if they are unable to perform in their profession.

Employer-paid disability insurance rates are taxable. So in addition to losing 40 percent of income (plus, any bonuses), it's estimated that employees forfeit another 20 percent for taxes.

What about Social Security Disability Insurance (SSDI) that is automatically withheld from employee paychecks? Most often, any SSDI benefits paid to an employee reduce the benefit amount that will be paid from the employer's disability insurance plan. For example, if an employee qualifies for $2,000 a month from a private insurance carrier plan and also receives $900 a month from SSDI, the actual payout from the private insurance carrier would only be $1,100.

All of these shortcomings can be protected with an independent disability insurance plan to supplement the one purchased by a current employer. Plus, when paying your own disability insurance rates, any benefits paid out in the future are tax-free.

But are independent disability insurance plans really necessary? That depends on your health, age, occupation, savings and your comfort level with risk. Statistics show that at some point in their careers, 20 percent of Americans will be out of work for a year or longer with a debilitating injury or illness. Of these incidents back-related injuries comprise the most common disabilities. But disabling illnesses such as cancer, lupus, fibromyalgia and Parkinson's are unpredictable, and disease rates are increasing. Can you live on 60 percent of your income right now? If not, do you have adequate savings to cover a sudden 40 percent gap in income?

When deciding if you need to purchase a supplemental disability insurance plan, first determine how much coverage you need. Then ask someone from your company's human resources department to help you calculate the disability benefits you would be entitled to under current plans. The difference between the coverage you need and the amount you would currently get paid will determine your shortfall. This number should help you identify the need for a supplemental disability insurance plan.