Last posted by Steve Bowen | brightpeakinsurance.com
Employer-provided disability insurance is a popular workplace benefit, and for good reason. According to the Social Security Administration, one out of every four 20-year old workers in the workforce today will experience a disability at some point before they retire.
While disability insurance from work can be very useful, you can’t assume that your employer’s disability insurance policy will provide enough coverage for your needs. Some employer-provided disability insurance policies have serious coverage gaps. To help you determine whether your employer-provided disability coverage is adequate for you and your family’s needs, we’ve compiled a list of factors to consider.
Disability Insurance Vs. Workers’ Compensation
When you say you have employer-provided coverage, do you have an actual disability insurance policy or do you mean Workers’ Compensation? They provide very different levels of protection. If you get sick or injured at work, you’ll receive disability income from Workers’ Compensation. However, if your disability wasn’t work-related, you won’t receive anything. Fewer than 5% of disabilities are work related, so the vast majority of disabled Americans will not be eligible for any benefits from Workers’ Compensation. So, it would be unwise to rely on Workers’ Comp as your only source of disability protection.
Many employers also offer a group disability insurance policy to their employees. These policies pay benefits to employees if they are disabled and unable to work, whether the disability is directly related to work or not. This coverage is more useful than Workers’ Comp, but there are still plenty of situations when it may not be enough.
Short Term Disability Vs. Long Term Disability
When you review your company’s disability policy, the first thing you should check is whether it’s a short term or long term policy. Short term disability insurance is meant for problems that last no more than a few months. These policies start paying benefits quickly but also typically stop payments after a few months.
As the name implies, long term disability insurance covers problems that last much longer. These policies make payments that can last years, or even the rest of your life. Long term disability coverage is more important than short term coverage because a disability that lasts for years will be much more expensive than one that only lasts for a few months.
If your company’s policy only provides short term coverage, it would be a very good idea to obtain long term coverage on your own. On the other hand, if your company only offers long term coverage, it’s not quite as urgent for you to get a short term policy. In theory, you could rely on your savings until the long term policy kicks in, but that depends how much you have saved up. It’s up to you whether you would rather pay for short term disability insurance, or use your savings while waiting for the long term plan to begin paying benefits. However, short term disability coverage is quite affordable.
Amount of Coverage
Another factor you should consider is the amount of coverage your company’s policy provides. If you become disabled, how much will the plan pay in benefits each month? Will it be enough to cover all of your expenses? If it’s too low, you could buy some insurance on your own so that you would have enough income if you were to be disabled. For example, if your employer’s policy only pays $1,000 a month and you need at least $4,000, you could buy your own policy with a $3,000 a month benefit to make up the difference.
Taxes on Payments
Keep in mind that the payments from some employer-provided disability insurance policies are taxed as income. It depends on how your employer is paying for the plan. If they are paying the premiums using pre-tax money, then your future disability payments would be considered taxable income.
You might expect to receive $4,000 a month from your policy when in reality, the after-tax payments may add up to only around $3,000. Probably the best solution to this scenario would be to buy a small individual disability policy that would make up for the money lost to taxes.
Length of Payments
What is the maximum period of time that your employer’s policy will make disability payments? Even long term disability policies can have a maximum payout period. For example, a policy might only pay benefits for 5 years. At the end of this period, you would stop receiving benefits from the policy even if you were still disabled. If your employer’s policy has a short payout duration such as this, you may want to supplement your employer’s coverage with a long term policy with a longer payout period. For example, one that will keep making payments until you turn 65. That way you will avoid being in a situation where your disability benefits run out while you are still unable to work.
Disability insurance plans usually have a waiting period before they start paying benefits, this is referred to in insurance as the “elimination period”. You need to be disabled longer than the elimination period before you receive anything. For example, if your plan has a 30-day elimination period, you would start receiving benefits on day 31 of your disability.
Short term plans have a very short elimination period, 14 days or less, so you probably don’t need to worry about covering this gap. However, long term disability plans can have an elimination period of up to 720 days – nearly 2 years! If your employer’s plan has one of these extremely long elimination periods, you may want to find an individual disability policy to fill this gap.
Leaving Your Job
If you leave your job, what happens to your employer-provided disability insurance? Some companies let you keep it. So your coverage stays the same even after you leave your job. Many employer plans end your coverage as soon as you leave the company.
If your coverage is not transferable, you should acquire an individual plan to make sure you maintain your coverage after you change jobs. Remember, just because your current employer offers disability coverage doesn’t mean your next one will.
If your employer-provided disability insurance has gaps, you need to find out as soon as possible so that you can supplement your employer’s disability coverage. Otherwise, you could be in for a nasty surprise when you actually become disabled. By going through this list, you can figure out whether your employer-provided insurance is enough, and, if not, the type and amount of coverage you should consider.