Disability insurance: How much do you need?

For most of us, our earning power is by far our greatest asset, one that our lifestyle and dreams for the future depend on. Just as homeowner’s insurance insures our homes and auto insurance covers our cars, disability income insurance insures our income if injury or illness prevents us from working. Disability insurance replaces a portion of one’s monthly income and is an important part of a secure financial plan.

It can be hard for any of us to face the fact that a disability can happen at any time. Unfortunately, the U.S. Census Bureau states that over 37 million Americans, about 12% of the total population, are classified as disabled. More than 50% of those individuals range from age 18 to 64, prime working years.

Without an adequate amount of disability insurance, individuals can potentially incur high financial losses, but how much coverage is enough?

65% of gross income is the industry standard

In today’s disability insurance market, a minimum of 65% of gross income has become the industry-standard target income replacement amount. Electing at least 65% income replacement helps individuals to maintain their standard of living in the event an injury or illness leaves them unable to work. But given that the average long-term disability claim, according to the National Council on Disability, is three years, an individual must have sizeable savings if they’re not insured at 65% income replacement. 

Employer-sponsored group long-term disability is a foundation

Many employers offer group long-term disability (LTD) insurance as part of their benefits package. Group LTD disability is a necessary foundation, but there are some important limitations and shortfalls to consider.

First, there’s no portability for group LTD insurance, which means an individual loses the coverage if they change jobs.

Second, if the LTD premium isn’t included in the amount paid in gross wages, or is paid with pretax dollars, benefits likely would be taxable if the covered individual becomes disabled. There are some exceptions, but they aren’t common.

Third, group LTD carriers can increase premiums or cancel coverage.

Fourth, some group LTD plans don’t cover certain forms of income such as bonuses and commissions, and not all carriers define those terms in exactly the same ways.

Supplemental high-limit disability insurance can bridge the gap

Disability income insurance carriers offer add-on programs that give employers an easy way to provide employees with additional supplemental coverage. Supplemental high-limit disability programs can bridge the gap, providing coverage on top of the current group LTD plan.

Supplemental high-limit disability can offer a number of benefits to executives, employers, and employees alike:

1. Policies are individually owned and portable. Coverage can’t be canceled by the insurer upon employment termination.
2. No medical exam or detailed underwriting is required (guaranteed standard issue). Typically, at least three lives are required for this type of program.
3. Premiums cost much less than if employees purchased the coverage on their own. The cost is heavily discounted because you’re buying as part of a group- or multilife program.
4. There are no offsets for social security disability or workers’ compensation, unlike those in traditional group LTD plans.
5. Benefits and premiums are usually guaranteed.
6. Individual high-limit disability covers all forms of income in the event of disability — W-2, bonus, and commissions are covered.
7. Highly compensated talent receives protection for excess earning not covered by existing group LTD plan.
8. Supplemental high-limit disability improves key talent retention, morale, and recruitment.

Consider these examples

To see how supplemental high-limit disability insurance can work, consider the following examples:

1. Dr. Mark is a 41-year-old anesthesiologist with an income of $350,000. His employer group LTD plan has a maximum benefit amount of $10,000 per month. This means Dr. Mark only has 34% of his income covered by disability insurance. To bridge the gap, when his employer made supplemental coverage available, Dr. Mark purchased an additional policy for $9,000 per month, bringing his level of disability coverage to 65% replacement.
2. A technology firm wants to improve employee retention and increase its disability insurance package. The group LTD plan provides 60% income replacement with a maximum monthly limit of $12,000 per month. Twenty-five of the firm’s executives or highly compensated employees exceed the monthly limitation on the group LTD plan. A guaranteed issue disability plan for these 25 individuals can improve the offering and increase their disability benefits to 65% replacement.

Final thoughts

While many types of businesses across a wide range of industries can benefit from supplemental high-limit disability, some are especially good candidates given their typically high income levels:

• Hospitals and medical groups, including cardiology, surgical, orthopedics, internal medicine, and many others.
• Professional groups, such as legal, accounting, architectural, and engineering companies.
• Technology firms, including computer, software, high-tech, and energy companies.
• Biotech, pharmaceutical, and cannabis businesses.
• Manufacturing executive and managerial groups.

Individually owned supplemental disability insurance isn’t as expensive as you might think. It’s especially convenient and affordable when combined with group disability as an add-on to provide meaningful total coverage. The higher the income, the higher the financial risk of disability, and the greater the need for adequate insurance protection.

Hopefully you and your employees will never have to deal with a disability that keeps you from being able to work. Still, it’s important to address income replacement as part of the benefits package you offer as well as your personal financial planning.

If you have any questions about disability insurance, reach out to us — we’re here to help.