If you are one of the lucky workers covered by an employer-sponsored group long-term disability (LTD) income 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 likelihood varies 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 disability. In fact, the Council for Disability Awareness reports, “Sixty-five percent of working Americans say they could not cover their normal living expenses for a year if their employment income was lost; 38 percent 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 is an excellent time to review your assets and consider how long your family could make ends meet if the primary wage earner suffered 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 enough benefits to meet all their financial obligations.
Limitations of Employer-provided LTD Policies
Group LTD policies typically have many limitations. For example:
- 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.
- Group LTD polices rarely 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 percent of salary with a maximum monthly benefit of $5,000, anyone making more than $100,000 per year receives less than 60 percent when faced with a disability.
Calculating Your Post-disability Income
Clearly, everyone who relies on a paycheck needs to assess how long he or she could continue to meet financial obligations, including any ongoing savings for education and retirement, in the event of a disability. 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, 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 are 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.
Article prepared by Northwestern Mutual with the cooperation of Eric Kala, CFP, CLU, ChFC. Kala is a Wealth Management Advisor with Northwestern Mutual in San Antonio. He works extensively with physicians and hand-in-hand with professionals from all lines of business, enabling clients to receive one-on-one, personalized solutions and comprehensive financial planning. To contact Kala, please call 210-446-5718, email firstname.lastname@example.org, or visit erickala.com. Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company (NM), Milwaukee, Wisconsin, and its subsidiaries. Eric Kala is a Registered Representative of Northwestern Mutual Investment Services, LLC, a subsidiary of NM, a broker-dealer, and member of FINRA and SIPC.
- 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.