Not being able to work may prove disastrous to a family’s financial well-being. However, transferring the risk to an insurance company via disability insurance makes sense.
What is disability insurance?
Disability insurance replaces income if an employee becomes ill or injured and can no longer work. Like life insurance, individual and group (employer-sponsored) policies exist. Here we discuss the general qualities of disability policies.
Benefits of disability Insurance
Being covered by disability insurance may provide several benefits, including:
-Replacing most income
-Preventing the erosion of accumulated assets
-Helping pay for medical bills while you are not working
Below, the discussion continues, outlining important reasons for considering disability insurance.
Occupational vs. non-occupational
Occupational coverage applies to injuries or illnesses related to the job, while non-occupational coverage is not related to one’s work. The former may constitute coverage originating from multiple sources, like a group disability plan through the employer or an individual policy and government programs such as Workers’ Compensation or Social Security.
Non-occupational and occupational coverage should not be confused with own-occupation versus any occupation terms. Own-occupation and any-occupation as described by MyLTDBenefits.com:
An own occupation policy typically requires that the insured be unable to perform the material and substantial duties of his or her particular occupation to be considered “totally disabled.” The disability need not render the claimant totally helpless; rather the claimant must be rendered unable to perform the material and substantial duties of his or her particular occupation…
…an “any occupation” standard to qualify for disability benefits. These policies typically define disability in terms of the insured’s inability to engage in any gainful occupation that the insured is reasonably suited for based on his or her education, work experience, and other individualized factors (1).
Group disability policies may start providing benefits under an own-occupation provision and later move to an any-occupation (1).
What is an elimination period?
Think of the elimination period as a deductible. It is the time period after the illness or injury during which benefits are not paid. The longer the elimination period, the lower the premium. The period may be a few days to 30, 60, 90, or 180 days.
Depending on the time period, coordinating your emergency fund to help cover expenses during the elimination period is a great practice. There are, however, circumstances in which this may be difficult. An example is a person who has landed his or her first faculty post but has not yet saved enough money to cover three to six months’ worth of living expenses.
Short-term versus long-term
Disability insurance fits into long-term policy and short-term policy classes. While the classifications suggest differences with respect to time, this comparison will review more information.
Short-term disability policies normally are provided only through employers. A few states (California, Hawaii, New Jersey, New York, and Rhode Island) require employers to provide such a benefit (2). The benefits coverage may start a few days after the illness or injury and will last only a few weeks to a few months. Because the coverage duration is short, premiums are affordable. Workers may also use sick or vacation time and emergency savings to accompany short-term policies. (Please speak with your HR department for more information.)
Long-term disability policies are more important from a planning perspective, as the duration of coverage may last from months to years. This makes such policies more expensive than a short-term disability product. The elimination period – the time during which benefits are not paid – may be anywhere from 60 to 180 days. During this period, the employee must provide the means to cover expenses. Long-term policies may be customized to suit the specific needs of the person.
How much coverage do I need?
Like life insurance, a host of factors influence coverage needed for a disability. The general idea, however, remains the same in terms of managing risk: replace the income stream lost because of the inability to work. Start by gathering your monthly outlays and add retirement account contributions, philanthropic giving, and health insurance premiums. Next, evaluate coverage provided by your employer. If the employer does not provide coverage, seeking an outside policy may make sense. Third, look for ways to make up a shortfall. This may depend on other income sources available. For example, a worker who is close to retirement may not need as much coverage because of his or her access to income sources like Social Security or a pension. Online calculators exist to help determine the coverage wanted.
Also, private policies are more expensive than group policies; premiums are influenced by health, age, income, and terms of the policy.
General provisions of Purdue coverage
Purdue provides both short- and long-term disability coverage. While all employees automatically receive coverage under the long-term policy upon hire, the optional short-term disability coverage may be provided after a year of employment for benefits-eligible clerical and service staff (3).
Short-term disability policy
As previously noted, the optional short-term policy (managed by Cigna) will be available to eligible clerical and service staff. Here are a few of the provisions:
-The benefit will cover 65 percent of your budgeted salary for the days and weeks you remain disabled, including pregnancy.
_”You must be deemed medically unable to work by the company that administers Purdue’s STD plan, and”
-“You must satisfy a 21-calendar day elimination period (4).”
– For a list of exclusions, click here (4).
The benefit will be employee-funded with pretax premiums. The annual cost may be figured by multiplying your annual budgeted salary by .0068 (4).
Long-term disability policy
Like the short-term benefit, the long-term policy is managed by Cigna with the following provisions:
-The benefit will begin after a 90-day elimination period for regular clerical and service staff and after 180 days for all other staff and faculty.
-Partial disability benefits may be available if an employee cannot work full-time.
-If an employee becomes disabled before the age of 60, benefits will continue until full retirement age as defined by Social Security. If the stated employee becomes disabled after the age of 60, a sliding scale will determine the duration of the benefits period. (Click here for more details.) (5).
-The benefit will be 65 percent of the budgeted salary plus 65 percent of eligible summer session earnings. Benefits may be lessened by other benefits received during the disability period.
Half of the long-term disability premium will be paid by Purdue University, while the annual cost of the employee portion will be the employee’s annual budgeted salary times .0029. The employee portion of the premiums will be used with after-tax dollars. (Click here for long-term disability exclusions.)
Incorporating into your financial plan
Depending on the time period and coverage of a short-term disability policy, coordinating your emergency fund to help cover expenses during the elimination period is a great practice. There are, however, circumstances in which this may be difficult. As previously noted, a new faculty member starting her career or a faculty member who has little to no savings may not be able to bridge the gap.
Another technique involves using other benefits to cover any short-term needs before the long-term coverage benefit begins. For example, use vacation or sick time as a possible funding source. The benefit will be complete coverage of your salary, but taxes may be taken out.
Taxation of disability benefits depends on who pays the premium and whether it was with pre- or post-tax dollars. Individual policies are normally purchased with after-tax money, making the benefits not taxable. However, employer-sponsored group plans may be different. If the employer pays the premium or portion of the premium that is not included in the employee’s taxable income, the benefit becomes taxable. Any portion of the premium paid by the employee with after-tax dollars will create a nontaxable portion to the corresponding benefit (6).
- Evaluate how much coverage is needed.
- Examine your current disability coverage and see if a shortfall exists.
- If a shortfall does exist, can you buy extra coverage through your employer? If so, how long will it be before your benefits enrollment period opens? Contact your HR department for more information about policy details, or contact me for planning questions.
- Examine outside policies, if needed.
- Call me at 317-805-0840 with financial planning questions and to help coordinate your university benefits.
- “Own Occupation v. Any Occupation.” MyLTDBenefits.com. Alan C. Olson & Associates, 2011-2016. Web. 5 Mar. 2016.<http://getmyltdbenefits.com/own-occupation-v-any-occupation/>
- Walters, Chris. “Long-term Disability vs Short-term Disability Explained – PolicyGenius.” PolicyGenius. 2014. Web. 05 Mar. 2016. <https://www.policygenius.com/blog/long-term-disability-vs-short-term-disability-explained/>.
- “Disability Coverage – Benefits – Purdue University.” Disability Coverage – Benefits – Purdue University. Purdue University. Web. 05 Mar. 2016. <https://www.purdue.edu/hr/Benefits/currentEmployees/disability/disability.html>.
- “Short Term Disability.” – Benefits. Purdue University. Web. 05 Mar. 2016. <https://www.purdue.edu/hr/Benefits/currentEmployees/disability/STD.html>.
- “Long Term Disability.” – Benefits. Purdue University. Web. 05 Mar. 2016. <https://www.purdue.edu/hr/Benefits/currentEmployees/disability/ltd.html>.
- “Taxation of Disability Insurance.” Financial Planning Advice and Financial Advisors. Ameriprise Financial. Web. 05 Mar. 2016. <https://www.ameriprise.com/research-market-insights/tax-center/tax-planning/taxation-of-disability-insurance/>.