Broker Check
The Income Replacement Endemic

The Income Replacement Endemic

| May 02, 2022

According to Cornell University[1], the statistics on disability are alarming:

  • In December 2018, payments to disabled beneficiaries totaled almost $11.7 billion. 
  • 86% of beneficiaries were previously employed.
  • Illnesses represented about 66% of all claims, with mental health disorders covered 30% of claims and physical injuries covered the remaining 4%.
  • According to the most recent available statistics, in 2018, almost 5% of people with a BA degree or higher in the United States between the ages of 18-64 reported a disability. That represents nearly 3 million of the population.

Despite these concerning statistics, disability insurance coverage is often overlooked, not only by successful, educated individuals, but also by corporations across the country.

Why is this?

Most people simply assume disability insurance is taken care of through their corporate workplace. They check the box at open enrollment each year but don’t understand the ramifications of the selection.

  • Only a percentage of their income is covered (60% is common)
  • It usually only covers their base salary
  • There’s always a monthly cap ($5,000-$20,000)
  • It’s taxable if paid by the employer or by the employee with pre-tax dollars
  • Is rarely portable when you leave the company.

If they’re lucky, the company may offer a buy-up: 

  • That covers an additional percentage of the base salary (up to 70% is common)
  • Covers a percentage of their bonus
  • Continues to have a monthly cap
  • Does not cover RSUs or other stock compensation 

If an employee become an independent contractor, changes employers or starts a business:

 The group coverage will likely lapse

  • It’s difficult to get or maintain coverage if they’re in transition as there is no income to protect
  • It’s difficult to get or maintain coverage if they’re starting a new venture as there is no income track record

Proactive planning specific to your financial planning and required cash flow risks is critical and disability insurance coverage needs to be part of that conversation.