Why your disability insurance coverage at work might not be enough

By: Kimberly Lankford

If your employer provides disability insurance as an employee benefit, you have some valuable protection if you get sick or injured and can’t work. But you may have less coverage than you think. It’s important to calculate exactly how much your policy would pay out each month, then compare the benefits to your monthly bills.

Most disability insurance policies at work only cover up to 60% of your base pay (not counting bonuses), up to a maximum of $5,000 per month. Payouts for employer coverage are generally taxable — further reducing the amount you have available to pay your bills.

If you need more than $60,000 before taxes to cover your regular expenses, or if you earn a large portion of your income from bonuses, then you may want to consider buying your own disability insurance policy to supplement the group coverage.

Individual disability insurance policies generally cover income from bonuses and have a monthly cap that is much higher than $5,000. The policies won’t replace your entire income, but they can cover up to 60% of your total compensation (including bonuses) and the benefits are not taxable — filling the gap even further. The insurer will want details about your work coverage before issuing you an individual policy to make sure you’re not overinsured when you add the new coverage.

The policy you buy on your own may also have a different definition of disability. Group policies often provide “any occupation” coverage, which means they’ll pay out if you are sick or injured and can’t do any occupation. Some individual policies, however, have “own occupation” coverage, which means they’ll pay out if you can’t do your very specific occupation — for example, if you’re a surgeon or dentist and can’t do the physical aspects of the job, but can still teach at a medical or dental school. You may still be able to do some kind of work, but the income could be much smaller. The own occupation policy would pay out and protect the income you earn from your specialized skills. Some policies provide own occupation coverage for two years, then switch to any occupation coverage. Find out about the definition of disability on your employer’s policy — and any individual policy you’re considering — and how well it covers the risk of not being able to do your job.

Another difference: Individual disability insurance is portable — you can keep the policy if you change jobs. Disability insurance from your employer, on the other hand, usually stops when you leave your job. You may have the option to convert your employer’s coverage to an individual policy at that point, but the new policy may be expensive and have limited benefits, a shorter benefit period, or a more restrictive definition of disability. If you’re in good health, it’s worthwhile to explore the market to compare your options.

If you’ve already lost your job, it may be more difficult to qualify for disability coverage. Disability insurance replaces lost income, and you usually need to provide information about your job and income when you apply. Insurers generally require you to be consistently at work doing your regular occupation for the last 180 days before they’ll issue a policy. If you were furloughed or laid off, you might not be able to get coverage until you are back at work again and have a 180-day track record.

If you plan to start a new business, it’s particularly important to consider getting your own disability insurance because you won’t have sick days or other benefits from an employer when you’re on your own. If you already have an individual disability insurance policy, you can keep it when you start your business. But you need to get the policy with plenty of time before you leave your corporate job — insurers usually ask if you plan to change jobs within the next six months. You may have a difficult time getting coverage if you plan to leave within that timeframe. It’s a good idea to apply for the insurance at least six to nine months before you expect to make the career change, or even longer.

If you’ve already left your corporate job and started a new business, it can help to act quickly to get disability insurance. Insurers typically look for at least two years of income history from self-employment to establish stability. However, some insurers are making it easier for self-employed people to get coverage before then: If you recently left a corporate job to start a new business, some insurers have special programs that will provide coverage based on your historical W-2 earnings from your old job, even if your new business hasn’t started yet. See Getting disability insurance when you are self-employed for more information.

Even if you have some disability insurance at work, it’s good to do a check-up to see if the coverage leaves any big gaps. And if you don’t have disability insurance as an employee benefit, it’s particularly important to consider how you would pay your bills if you were sick or injured and couldn’t work. Find out how long your sick days would last, and calculate whether you could pay your bills without your income after that. If you have money in savings or your spouse works, you may be able to cover the expenses. But you could get disability insurance to cover the risk. An individual disability insurance policy could cover up to 60% of your income, either for several years or until age 65, and benefits are not taxable if you pay the premiums yourself. For more information, see Picking the right disability insurance policy.

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