An essential question that is often asked, and one that should always be considered first and foremost. Here are a few questions you may already have about entertaining disability insurance coverage:
What am I offered at work?
It’s very important to understand the amount and type of coverage you have at work. Typically, it will be a flat amount or a percentage (50-70%) of your salary. There will always be a cap as to the amount per month it will cover.
For example, if you have 60% coverage at work with a monthly cap of $20,000, then you would receive $5,000 a month in benefit on a salary of $100,000 annual. This is 60% of your income or $60,000 annually. If you have a salary of $1,000,000 and have 60% coverage at work with a monthly cap of $20,000, you will receive $20,000 a month, or $240,000 a year. This would represent only 24% of your gross income.
Most workplace policies only cover base salary. This is important to be aware of if you have a large piece of variable compensation such as bonus, stock awards or profit distribution. If your total earnings were $100,000 and that was divided between a base salary of $75,000 plus a bonus of $25,000 than your monthly benefit in the above scenario would $3,750.
Who pays for the benefit and is it paid pre-tax or post tax?
This is a must know. If the employer is paying the premium – the actual monthly benefit would be taxable to you as earned income. If you’re paying it with pre-tax dollars, then it’s the same deal. If you are paying for it with post-tax dollars or electing to be taxed with imputed income on the employer paid premium than the monthly benefit would be income tax free to you.
There is a huge difference to your wallet in the above scenario if the $5,000 a month is tax-free or taxable!
Can I live off the monthly benefit and still save?
Will this monthly benefit allow you to cover all your bills and provide for your family? Will it allow you to reach your savings milestones like college and paying off the mortgage? Then there’s the biggest question. Retirement.
Remember. All of these group disability insurance coverage plans stop paying at a certain point in time. The typical, high quality workplace plan stops paying at age 65. What happens then? After that it’s all social security and retirement savings just like any other retiree. If you have gone many years without saving into a 401k or receiving a match – will you be able to provide for yourself in retirement?
Am I anticipating a career change at some point?
If you have intentions to leave your current employer, you probably shouldn’t rely exclusively on their benefits. Do you intend to start your own business at some point? Do you want to maintain the flexibility of leaving corporate America to start a family down the road? Do you want to be able to consult part-time or full-time? Do you have visions of joining a start-up that may not have the best group benefits at first? If you answered ‘yes’ to any of these questions, then having your own disability insurance coverage may be critical for you moving forward. Once you have your own coverage, it can’t be taken away from you and the rates are usually guaranteed throughout your working years!
If you’re in the minority of people who can live off a portion of their current income and still achieve their financial goals, then you may already be all set. You don’t need supplemental disability insurance coverage.
If you’re not in that situation, then it may be worth a conversation about protecting your biggest asset: your ability to earn a living in the years to come.