Most serious injuries that prevent a
person from continuing employment do not occur in the workplace.
Car accidents, slip-and-fall incidents and
other unforeseen health disasters can mean
months of not working. Most people assume
disasters will never happen to them, but
severe injuries or illnesses happen all the
time, and they often lead to permanent disability, which means no income.
It’s a scary thought, and one that no
employee wants to think about. That, combined with a troubled economy, makes long-term disability insurance somewhat of an
afterthought. But, having this coverage may
be the best investment a working individual
makes in securing his or her future.
“If your car was wrecked, you could
replace it within a reasonably short period of
time,” says Richard Gary, CLU, associate
director at SS&G Financial Services, Inc. “If
your home was damaged, you could repair it
through homeowners insurance. But if your
income was taken away, could you replace
that on a guaranteed basis? The answer for
most people is no.”
Smart Business spoke to Gary about long-term disability insurance and what details to
review when designing a policy.
Why is long-term disability insurance so
important?
Long-term disability is defined as an illness
or injury that prevents one’s ability to fulfill
job duties. Because the range of ‘disability’ is
so broad, the likelihood of suffering from
long-term disability is greater than most
expect. What if you suffer from a heart attack
or stroke that prevents your ability to function fully at work? What if you develop carpal
tunnel syndrome?
There are endless what-ifs, and the fact is,
one in three working Americans will become
disabled in some capacity for more than 90
days before age 65. They may take advantage
of an employer’s short-term disability insurance, but that coverage may stop after 90
days. What next? Hopefully, the answer is
that long-term disability insurance kicks in,
but for 82 percent of Americans, that is not
the case. Only 18 percent of people have
appropriate levels of long-term disability
insurance. Also, with the working population delaying retirement and, therefore, maintaining employment at an older age, the incidence of disability is much greater.
What factors affect premium costs for long-term disability insurance?
Cost and a lack of awareness are the primary reasons workers do not have long-term
disability insurance. The factors that affect
premium cost include the industry and job
description; current earned income, including salary and bonuses; physical health; age;
the length of time before the coverage begins
paying benefits (the elimination period); and
the length of time the benefit can be paid.
For instance, if you earn $4,000 a month at
a desk job, you are 40 years old and in good
health, and your employer offers disability
insurance coverage, your premium will be
lower than a person who earns the same
amount but works in a higher-risk job, such
as construction, or an executive earning
$10,000 a month.
There is a slew of variables that figure into
the level of coverage and premium cost, but
a general rule is a premium cost is 3 percent
of earned income for covering two-thirds of
your income. A professional who is well versed in long-term disability insurance
should examine the details with you.
What contract language is critical to examine
before signing on to a policy?
With long-term disability contracts, the
devil is in the details. First, examine the definition of ‘total disability.’ Does disability
mean inability to fulfill your job duties or the
complete inability to work at all in any position? If a policy definition is the former and
you can still work but cannot do your exact
job, long-term disability coverage would
begin because disability is defined as not fulfilling your job duties. However, if disability
means the complete inability to work — you
cannot do your job or any other job because
you are totally incapacitated physically or
mentally — then coverage may not begin if
you are able to work at any other job.
Next, examine the coverage structure
based on your current salary and what you
will earn while disabled. If your contract permits you to use your abilities and education
in another position, but not the exact occupation you held before you became disabled,
then that contract would fill the salary gap.
Also consider your elimination period. This
is the period during which you are disabled
and not covered by long-term insurance.
Often, a group short-term disability policy is
in effect during this time. Depending on your
industry and job, your elimination period
may be as short as 30 days or as long as 365
days. You must examine how long you are
comfortable handling your expenses before
the coverage begins. Review this with your
insurance professional.
Why might an employer choose to extend an
option for long-term disability insurance?
As with company retirement plans and
profit-sharing programs, long-term disability
insurance is viewed as a valuable benefit and
can help attract and retain quality employees.
An employer can contribute toward a portion
of the premium or simply act as a sponsor by
offering the plan to workers through an
insurance company.
RICHARD GARY, CLU, is an associate director at SS&G Financial Services, Inc. (www.SSandG.com). Reach him at (800) 869-1834 or
[email protected].
