Imagine the difficulty of living without a paycheck if you were suddenly to become disabled. A heart attack, stroke, or car accident is all it takes to put your plans for the future on hold. Fortunately, there are ways to reduce your risk significantly.

1. Group Disability Insurance. This is provided at your place of employment. A typical plan pays 60 percent of your salary after a 90- day waiting period. If your employer pays for this coverage, the benefit paid out is taxable. Group plans reduce their payments for those who receive social security.

Even if you are fortunate enough to work in a job where this benefit is provided, consider augmenting your group coverage—the cost should be affordable and the benefit will help offset what you’d pay in taxes on the group benefit. If you make $100,000 a year and become disabled you will receive $60,000 in disability benefits. If you are in a 25 percent tax bracket, that will be reduced by $15,000—forcing you and your dependents to adjust to receiving just $45,000 a year. By adding an individual policy you can receive benefits of at least $15,000 from an individual carrier and make up what you pay to the tax man. Group disability contracts can also be structured so that you pay the premium instead of your employer. That way you can receive the benefit tax-free at claim time.

David Martin, an attorney at Ford, Martin and Abernathy, represents individuals who have trouble receiving their benefits. He has written articles surveying case law, and offers another perspective on group disability coverage. In some cases, insurance companies have denied claims by using the contract language to their advantage. He advises a careful look at the contract before purchasing coverage, otherwise, he says, there is “a risk that you may see the benefit slither away right before your eyes when you need it the most.”

To qualify for group disability coverage, a company must have 10 full-time employees.

2. Individual disability insurance. This is coverage you purchase yourself, and payments are based on your industry classification, income, and health. There are important distinctions between the contracts that different carriers offer.

Some carriers have contracts that allow you to receive a payment if you are unable to work in your own occupation because of a disability, even if you are working in another capacity. For example, if a surgeon becomes disabled in a way that makes it impossible to perform surgery, the insurance company will pay 60 percent of his salary as a surgeon while he continues to work and earn money as a general practitioner. This feature is not available for all industry classifications, but for physicians and attorneys.

Some individual contracts have a catastrophic benefit. This feature, if added to the contract, will pay an additional monthly benefit if your disability is severe and you are unable to perform basic living activities like bathing, dressing and eating. The cost of this rider is insignificant, considering the additional coverage it provides.

Unlike a group plan, payments made to those with individual disability coverage are not taxed because these premiums are paid with after-tax dollars.

3. Long Term Care Insurance. There are good contracts that pay a benefit if you are no longer able to perform the basic activities of daily life. These are not tied in any way to your earnings or occupation.

Long term care insurance is designed to cover extended health care needs and is available to anyone over 18. Although the coverage is targeted to adults approaching their retirement years, it is an excellent option for people whose industry classification prohibits the purchase of disability coverage tied to income. In fact, 45 percent of claims for long term care insurance are paid to individuals under 65. For approximately $20 a month, a 24-year-old can buy a benefit of $6,000 a month, while someone 35 years old would pay approximately $35 a month for the same coverage.

If you own traditional disability insurance, consider transitioning to long term care insurance when you turn 50. Why? Your disability coverage cuts off after age 67; for every year you keep the coverage, the benefit paid out is reduced. Long term care insurance is just the opposite: every year you own the coverage the paid benefit increases, giving you reliable coverage throughout your retirement years.

I hope this article clearly emphasizes the importance of owning disability coverage. We all insure our homes and automobiles, but the effect of losing a regular paycheck could be the inability to pay for these things, and undermine your plans for the future. Disability insurance can protect us in the event the worst does happen. and employee benefits. information.


Article by Babs W. Hart originally appeared in
The Tuscaloosa Business Ink.