One of the most overlooked parts of an overall financial plan is the benefits package you receive from your employer. Last week I reviewed the areas of life insurance. For younger employees, the area of income protection can often be far more important than the area of life insurance. This week, I will cover how to analyze the group protection you have at work for disability insurance. If your employer doesn't offer this coverage currently, it should be at the top of your list to get yourself some individual disability insurance coverage. Disability coverage can be some of the most confusing coverage to understand, and the real details about your policy are within the benefits manual you receive from your employer.
You will generally have two types of coverage through your employer. Your short term disability (STD) coverage will normally take effect somewhere from 0 to 14 days after your disability, and may last somewhere up to six months to a year in length. Then, your very important long term disability coverage (LTD) will kick in when your short term coverage expires. In most group disability insurance, the benefits will start after six monthly and pay a monthly amount based upon your salary, salary and bonus, or your total earnings. Here are some key questions to be asking yourself when you review your overall coverage.
- Is my plan integrated with Social Security? The majority of group long term disability plans will be integrated with Social Security. What this means is if you actually qualify for Social Security disability benefits then whatever amount Social Security pays you will be subtracted from the benefits you receive through your employer benefit program. Remember, any disability insurance premiums that are paid by your employer will result in the disability benefits being taxable down the road should you receive them.
- Does my plan have a monthly cap?Most disability insurance plans will have some sort of monthly cap on them. What this means is that the disability insurance may cover 60% of your earnings up to a maximum of $10,000 per month. If you are a highly paid employee making several hundred thousand dollars per year, this could put a wrench in your overall financial plan by not providing you with enough coverage.
- What type of earnings does my plan cover? Some group plans will cover salary only. Some group plans will cover salary and bonus. Very few plans will cover commissions or total earnings over the last year. Almost no plans will continue to neither make contributions into your 401(k) plan nor allow you to continue to receive the company match or pension plan contributions. You need to really understand what kind of earnings your long term disability plan covers. Most participants think about how they will cover their personal expenses in the event of a disability, but completely ignore continuing to save for goals such as retirement and college education.
- Does it cover my own occupation? Doing the duties of your particular job is what helps to make you a success at your company. Your group disability plan may or may not pay your benefits depending on the definition of you being able to do your own occupation or any occupation. For the large part, group disability plans will only cover your own occupation for a short period of time. After that time expires, if you can get any type of gainful employment, the policy may not pay you anymore.
Analyzing disability insurance thoroughly is truly about reading the fine print of your policy and asking the right questions. As the CEO of your family finances, the first real step is in determining what expenses you would have in the event of a disability, and what net money you would get through your current group coverage. Many people believe that a long-term disability will never happen to them, however just over 1 in 4 of today's 20 year olds will become disabled before they retire. (www.disabilitycanhappen.org)
Go to www.oxygenfinancial.net to request a consultation to figure out if you have chosen the right benefits from your employer. If you are a small business owner, disability insurance is a must to protect your income.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder oXYGen Financial, Inc
oXYGen Financial, Inc. co-CEO Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice and Smart Money Moves to the X and Y Generation.
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