Can You Live Without a Paycheck? The Ins and Outs of Protecting Your Income

So you’ve got a disability insurance policy through work. You’re set. Right?

Maybe not. It’s important to understand that disability coverage is not as simple as “can’t work = get paid.” Let's explore each of the moving parts of disability insurance.

Short-term vs. Long-term: What’s the Difference?

The first thing to determine about your disability coverage through work is whether is short-term or long-term. (On some occasions, employers offer both.)

Short-term disability policies are advantageous in that they typically only have a brief waiting period – the amount of time you’d actually have to be disabled before you got paid. How short? The typical disability policy’s waiting period is between 7 and 30 days. Sounds great, right? Well, there’s a catch. The “short” in short-term is actually referring to how long you will get paid if you can’t work. This is typically between 90 days and a year, with most falling far short of a year.

The average disability lasts for more than five years. Are you covered in that scenario?

If you’ve got a long-term disability policy, you’ll wait long to get paid, and then get paid longer. Most long-term disability policies have a waiting period of 30-90 days. After that, they often pay you until you’ve reached your full retirement age. But there’s a catch: in most cases, group coverage will only pay that long if you are completely unable to work. This brings us to the next section: disability definitions.

Here’s how we define those.

I Can’t Do the Job I’ve Been Trained To Do. Pay Me.

You want Own Occupation, or “Own Occ.” This is by the far the best definition of insurance to have. If you’re not able to do your job, you’ll want to make sure that the insurance company will continue to pay you. “Own Occ” ensures that you’ll keep getting paid, even if you decide that you want to do something else.

Things that are “the best” tend to be more expensive, and “Own Occ” is no different. Those looking to save a little money on their monthly premium payments may choose Modified Own Occupation. This is one of the most common definitions found in many group disability policies. It states that if you’re not able to the job you’ve been trained to do, you’ll get paid. Want to do something else for a living? Go ahead, but don’t expect the insurance company to pay you.

I’d Be Happy To Do Any Job, Regardless of Pay.

Kudos to you. Feel free to consider Any Occupation, or “Any Occ.” If you’re gainfully employed in any manner, that means the insurance company won’t pay you. Also, the insurance company reserves the right to re-examine your health on a regular basis, so that if you’re able to work, they don’t have to pay.

Note: Some policies (even in healthcare systems) have a combination of definitions. For example, one policy I saw stated that disability would be defined as “modified own-occ” for the first two years, and thereafter, Any Occupation. Obviously there is a big difference between the two, and it might be a very rude awakening to stop getting paid just because you’re able to flip burgers when you’re trained to be surgeon.

What If I Can Do My Job, But Not Full Time?

You’ll be happy that you chose to buy a policy with a loss of income rider known as residual disability. Caution: be sure that the residual disability rider you have covers loss of income – not just loss of time and duties.

On his website, about-disability-insurance.com, author Steve Crawford sums it very well in the following example:

Let's assume this person is in sales, or a small business owner. Assuming they are totally disabled for a period of six months to a year, does anybody think that when they come back to work their income will jump up to what it was before they were disabled? The answer is likely to be no. They may have to come back to work for longer hours, and work even harder to get back the clients they lost while they were away, get new business in the hopper. Then maybe several months later they could hope to increase their income towards the previous level. The bottom line is that people may be residually disabled for a much longer period of time than they are totally disabled.

Be Sure That It Covers The Bills

You won’t find a disability policy that will replace 100% of your income. In the risk management world, this is known as “moral hazard” – specifically that some would be incentivized to call themselves disabled because they’d get the same paycheck. It’s the same reason deductibles exist.

You’ll find that most disability policies will replace 60-70% of your monthly income. If you’ve got it through work, that almost universally is 60-70% of your salary only, not overtime, bonuses, or performance-based incentive pay.

This is where having a supplemental policy is critical. Not only is your group policy potentially not going to pay you if you’re able to work the check-out line at the grocery store, but it might not even pay what could have made up the bulk of your income. As a result, you’ll suffer more than a 50% result in earnings. Keep in mind that in this case, you could also have some hefty medical bills. And we haven’t even talked about taxes yet!

Who Pays Uncle Sam?

If you’re not paying for your coverage, you’ll pay for it big time if you actually need to use it.

Disability premiums that are paid in full by an employer result in benefits that are 100% taxable to the employee. If they only pay for part of the monthly premium – say 50%, for example – then 50% of the benefits will be taxable. The only way it will be truly tax free is if you pay for the coverage yourself.

This is where having your own personal policy is great. You’re paying for it, so you know that any benefits will be tax-free to you. And there’s an additional great benefit.

Changing Jobs

Life is unpredictable. As kids, we dream of what we want to do when we grow up. As a adults, many of us jokingly say the same thing. In either case, we usually end up having no idea where we’ll be. Life is chaotic and ever changing. It’s because of this I’m such a huge advocate of personal life and disability coverage.

With your own policy, you can take it with you, even if you leave your job. There’s no guarantee that the next place you go will even have disability benefits. And if they don’t, there’s no guarantee that your health will allow you to qualify for your own policy. There’s no time like the present to explore getting your own policy, because while you can’t control the chaos that is tomorrow, you can control the action you take today.

Cost of Living Adjustments

When I was a kid, I would go through the checkout line at K-Mart with my mom and ask if I could get a bottle of soda. I still remember sodas being priced at 75 cents. Last week, I stopped a gas station and picked up the same bottle of soda for $1.89, more than double the price in about two decades.

We used to visit friends of my parents on a regular basis, and I would get excited because they had a giant television and, more importantly, video games. I remember being shocked when my mom’s friend told me that her son had picked up a Sega Saturn for $250 – brand new. This was a state of the art gaming console. How much is a brand new, state of the art gaming console today?

Welcome to inflation. If you’re old enough to read and comprehend this article, then you’re likely old enough to have already experienced it yourself. Stuff gets more expensive as time goes on, and it’s not just soda and video games. We need to be sure the money we have to spend is prepared to fight that battle. That’s why your personal policy should also include a cost of living adjustment rider, or COLA.

Typically COLAs will increase between 3-5% per year, increasing your benefit before and after you become disabled. Another downside to those with group coverage – this rider usually isn’t included.

Okay, I’m Convinced: I Need To Do Something. What’s First?

Your situation is unique, so you should seek objective, third party advice from the person who understands it best: your financial advisor. That may sound like a cop out answer, but think of it this way: a set of neighbors, though right next door, can have drastically different financial circumstances. The one with fifty thousand dollars in savings needs a different elimination period than the one with no savings whatsoever.

A good financial advisor will help you review your existing coverage – be a policy you have at your job, or that you bought on your own – and help you understand any holes and gaps in coverage. Your advisor will also help you understand if you can qualify, and what insurance carriers are worth taking a look at (hint: get a carrier with good financial strength – you’ll want to be sure you get paid if you need the benefits.)

The bottom line: solving the disability puzzle is not a simple equation. There are dozens, if not hundreds, of factors to consider in determining whether you have “enough.”

Think the decision can wait? A solid disability plan is the bedrock of a sound financial plan.