By Richard A. Aubrey
What’s disability like?
If you’re reading this before lunch, take the afternoon off. If not, start tomorrow. Sit on the sofa at home with the telephone—in case somebody calls, which they probably won’t.
Think about what’s happening at work. If you’re the business owner, think about what isn’t happening (or worse, what might be!) while you’re not there. If you’re an employee, think about how they’re spreading out the work you used to do. If you own the business, you can direct somebody to write you checks… until they bounce. If you’re an employee, you can only hope.
Besides, the IRS may disallow the deduction, which will make a big financial difference. If you’re a working shareholder, you could end up getting dividends (by IRS reckoning) instead of a wage. Might that mean something about recalculating the income of other shareholders? They may have to get dividends, too.
Whether you’re an employee or an owner, don’t count on the business paying you for long.
Then what happens?
If the business pays somebody for being out on disability, they’ve set up an ad hoc disability policy and that could be chancy. Say one guy is out for three months and then gets better. He’s paid all the way through. The next guy is off and isn’t coming back. He’s permanently disabled. When you go to court, which you will, did you pay the first guy for three months or did you pay him until he got better? You paid him until he got better…which means you’ll pay the other guy until he recovers, too.
You ought to have a pre-determined sick pay plan. The problem with that is, the obligations are pretty clear, so it’s not likely to be generous. The business probably couldn’t afford it.
Workers’ compensation pays but it may be limited and you have to show the problem is work-related. It’s one thing if you fall off the loading dock and break your leg; a heart attack is quite another. Your auto insurance may have wage-loss built in; that varies by state. But that only pays if you get smacked in your car. Social Security? You have to be really, really sick. It is hard to qualify and the benefit is limited.
The employer may have group disability: short-term disability generally lasts three or six months; long-term disability usually pays until age 65. The benefit is generally restricted to about two-thirds of your wages, ranging from 60 to 70 percent. It could be considerably less if you’re a highly compensated employee and there is a maximum or cap on the plan. Instead of getting, say, $6,000 when your plan pays 60 percent of income and you make $10,000 you may draw only $4,000 if the benefit is described as 60 percent with a maximum of $4,000. Many plans have this cap built in—sometimes an unhappy surprise. Worse yet, your employer may not offer this benefit at all.
No money coming in? Bills accumulating? Plans falling through the floor? Debts piling up? You get to enjoy it 24/7, because daytime television still isn’t interesting. It’s like being unemployed, except there’s no prospect of getting a job. No possibility of improving your situation. No money and no hope.
Disability income insurance
You ought to have individual disability income insurance. It will help when your employer offers nothing; it will help when you’re on your own or starting up a business. If your employer offers group benefits, it will pay on top of those. It might be enough. I had a client who, by luck and cunning, had arranged, well in advance, to have slightly more money coming in should he ever be disabled than when he was working. It worked. He told me, from time to time, that it still wasn’t enough. There is no such thing as too much money when you’re disabled. Taking a one-third cut in pay on the same day you run out of ways to help yourself is not going to strike you as a very good thing. And that’s presuming your employer offers group long-term disability.
Let’s talk about individual disability income insurance, the kind you buy, own, control and take with you. There are two concerns in getting individual disability income insurance. One is issue-and-participation limits; the other is underwriting.
Issue and participation limits are the result of sore experience. Companies have learned that any time people get more than about 70 percent of their net working income, it takes a lot longer for them to get better. It takes so many of them so much longer that an insurer might end up broke trying to pay them.
There is no law limiting the amount of disability income coverage you can have; the insurance companies try to limit it. They each have an idea of how much benefit they will issue for any amount of income you have and will issue up to that amount. If you already have some coverage, they will participate by issuing the difference between the two. They don’t want to be caught insuring a person who’s not quite certain whether going back to work makes good financial sense. They want to create a certain desperation factor. It helps you get better. That’s their plan. Yours should be different.
If you don’t have individual disability income insurance, get it as fast as you can. The reason for that is underwriting. You have to be insurable to get individual insurance: it’s not like life insurance. You have to be pretty sick to be dead. Disabled is a different story. In fact, disabilities lasting two years or more are three times more likely than death before age 65. You can never tell when something is going to sneak up on you—like a spell with a bad back or a bout of skin cancer or something more serious—that will make it hard to get coverage. Individual disability income underwriters are picky. Get this now, while you still can.
You may find that your employer provides the coverage, bringing you up against the individual disability income carrier’s issue and participation limits. The employer offers 67 percent? Well, that’s just about the individual disability income carrier’s limit, too. No luck. Not quite so fast. Employers, almost without exception, pay the premium for the group plan, deduct it as a business expense and don’t require you to show it as other income for taxes. That’s wonderful—until you stop showing up for work. Because it also means the benefit is taxable. Some of the individual carriers (but not all) will calculate your after-tax receipts from the employer’s plan and see if there is any room to issue some coverage. The individual plan benefits are not taxable, by the way. This is certainly an avenue to explore.If the individual insurer calculates that there is room within the limits to issue more, the amount will be modest, but then so will the premiums. And if you are disabled, you will need the money. Boy, will you need the money.
If your compensation is substantial and if the group policy has a cap or maximum, the difference between what you will net from the group and what the individual carrier will issue is much larger and much more necessary. If you are grossing $10,000 a month and the group plan is capped at $4,000, you will get $4,000, taxable. Individual carriers might issue or participate in, say, $6,500 at that income level. Correcting for taxes, they may decide you will net $3,000 from the group plan and so they have the room in their issue and participation limits for an additional $3,500 of monthly benefit.
Group plans are not underwritten, as a general rule. Some companies will guarantee issue—no underwriting—groups as small as two. If you are not insurable, see if you can influence the boss to put in a group. Chances are he’s not that insurable either and he might be willing to work with you.
There are association plans, as well. If you belong to a professional association, see whether they offer the benefit. Group plans can be issued if you already have an individual policy; so can association plans. Given an ideal situation, you would get the individual plan first, before other coverages limit the company’s issue amount. Then try to get your employer to put in a group and apply for the association plan, too.
You really don’t want to be in a position where it’s a relief that the phone is shut off, because now the bill collectors can’t bother you.
About the author
Richard A. Aubrey CLU has been in the life insurance business for more than 30 years. His interest is in individual insurance, both life insurance and disability income coverage. A graduate of Michigan State University, Aubrey is at Piper McCredie Agency Inc. and can be reached at firstname.lastname@example.org