“What If…?”: A Question of Disability Insurance

Imagine: what if you could not be an attorney? It takes years of education, training, and commitment to practice law. It takes just as much to build your lifestyle. Yet, one moment, whether due to an accident or illness, can derail or severely alter all that you have worked for through those years of dedication. It is easy to think “it won’t happen to me” regarding forces completely out of your control— until it does. So, how will you protect your firm, your family, and yourself?

What is disability insurance and who needs it?

• One in four non-elderly Americans suffer financially from unaffordable medical bills and medical debt.
• Media powerhouse USA Today asserts that debt from health related expenses is the top reason for personal bankruptcy filings in the U.S.
• The Social Security Administration has found that, 25% of 20-year-olds today will become disabled before reaching the age of 67.

Do you still believe it could not happen to you? Even with the risk of developing a potentially life altering disability so high, only 20% of people own disability insurance.

Disability insurance helps to protect the insured’s income should they develop a disability, either an injury or illness, that prevents them from working for a period of time. The money that is disbursed on a monthly basis from this policy can go toward paying bills and/or daily living expenses that may be difficult to manage without a steady income for the duration of the insured’s disability. Coverage does not replace 100% of the insured’s income, however insurance policies do pay a high percentage, generally 60% but could be as high as 70%.  

What’s the difference between a group and an individual policy?

Group disability insurance is a benefit through an employer or association. Long-Term Disability (LTD) may be available from an employer or can be purchased on an individual basis from an association, etc. It is intended to cover the insured for illnesses or injuries that put the insured out of work for at least a few months.

It is not so much that a group policy and an individual policy are different as it is that they complement each other. The gap in coverage between what the average group policy covers should the insured become disabled and the actual cost of living with a disability can lead a person and their family to severe financial hardship. Individual policies can bridge that gap, helping to provide a more stable future for those impacted. Essentially, for an individual covered by a group policy, individual disability insurance can wrap around that coverage to help protect more of their income.

Aside from not being portable, the challenge with relying solely upon an employer’s disability insurance is that these policies usually only cover 60% of social security wage base pay and are taxable. While employers may advertise that LTD benefits are generally paid for on a pre-tax basis, those benefits will be taxed when they are received. For example, in 2017 the average lawyer in the U.S. earns $115,820 per year, according to U.S. News & World Report. This means that an individual receiving disability would get $76,320 per year pre-tax. To add to the challenge of adjusting to a much smaller paycheck per month, funds dispersed from a group policy are also taxable. Disability payments are not subject to FICA (OASDI) but are subject to income tax.  So you could assume a 30% tax rate – e.g. $76,320 of disability payments would pay income tax of around $22,896 (fed, state and local) for a net income of $53,424.

This gap in coverage can be filled through an individual disability insurance policy. These policies, purchased through an association or other outside resource, are not taxable and are owned by the insured as long as the insured remains eligible and pays the premium.

What does it mean to be disabled?

Think you know the answer? One of the most important considerations when evaluating policies is how disability is defined. The Americans with Disabilities Act (ADA) defines an individual with a disability as “a person who has a physical or mental impairment that substantially limits one or more major life activity.” Each policy, whether group or individual, may define disability differently which will directly impact how and when the benefits are paid out.

As with most other types of insurance, there are various types of disability insurance policies:

1. Own occupation. This policy is often the most expensive but offers more broad coverage for the insured than the other types of policies.
2. Reasonably suited. This type of policy is considered mid-level coverage in both what it offers and its premium pricing.
3. Total disability. This type of policy is typically the least expensive.

Most group policies are the latter two options, Reasonably Suited and Total Disability. Additionally, there is the option to create a policy that will only last for a certain period of time. This window of time can help foster a smoother transition financially for the insured to their new normal after becoming disabled.

A feature you will want to look for is called “own occupation.” In other words, the policy considers you to be disabled (with some other stipulations, such as the inability to do certain activities of daily living) when you cannot do your exact job, not just any job. It is also important to consider a Residual Benefit that would continue to provide a benefit if you can work part time.

Also, disability insurance can be complicated.  In addition to how disability is defined there are multiple benefit periods, waiting periods before benefits begin, cost of living riders, so it is important to get advice you can trust.

How much does it cost?

By working with the USI Affinity Sales Team to create a policy specially designed around your needs and budget, Disability Insurance coverage can be affordable. Considering the rising odds that any given person could end up with a disability at some point in their lifetime, a policy can be a life saver in the event it needs to be activated.

What does my American Bar Association membership offer me?

As a member of the American Bar Association, Individual Disability Insurance solutions are available through the ABA Insurance Program to help you continue saving for your retirement and protect your assets. You may be eligible for up to $20,000 per month in non-cancelable coverage has guaranteed premium rates to age 65 as long as the premium payments are made. These policies are owned by the member and portable. Additionally, ABA members receive a 10% discount. There are many options to customize a plan to fit individual needs and budget.  Learn more about your individual disability insurance options here.