In our prior blog, we introduced the subject of disability insurance, which is critical for any individual or family as they build their career and approach retirement. In today’s post, we will explore disability insurance in depth, learning how short-term and long-term disability plans work.
Short or Long?
Disability insurance comes in two main variants: short- and long-term income replacement coverage for individuals who lose their ability to work.
Short-term disability coverage generally starts to pay out after a week or two of an individual's inability to work, replacing around 60% or more of their regular income. While each plan varies, some are more generous, with coverage starting at 100% of a worker’s base wage and decreasing over set intervals. However, coverage usually ceases after a few months, regardless of whether the disability disappears. For those with better plans, coverage may last up to one year.
Long-term disability insurance generally has a waiting period of ninety days before it starts to pay replacement income for the worker. However, while this waiting period is much more extended, many long-term plans have a look back and will pay the individual back for the duration of the waiting period once benefits commence. Unlike short-term plans, long-term disability policies can pay out for decades if the disability does not disappear, remaining in force until the individual reaches retirement age. Still, this is optional; many people will select plans offering payouts for a minimum payout period of five to ten years. Lastly, long-term coverage rarely replaces the entirety of an individual's income and instead pays out around 60% of their missed wages.
Employer / Group Coverage
Most larger employers that offer disability insurance to their workers provide a basic short-term disability plan free of charge as a benefit and offer additional subsidized short- and long-term coverage. In such situations, the coverage is usually far less expensive than what individuals can find on the open marketplace.
Still, many employers may offer only one or the other, and self-employed individuals are left without both by default. For people in such situations, supplemental or standalone short-term and long-term disability policies are a great option. They are relatively affordable, and cost increases as the replacement income payout increases.
Payout: A Caveat
With both short and long-term policies, the most critical caveat is how the insurer defines disability.
Some policies define disability as the inability of an individual to complete their assigned role and responsibilities. In contrast, others may stipulate varying degrees of inability to complete any job as required.
Still, some policies will allow an individual to collect partial or complete benefits for a given duration if they can only partially complete their daily work duties.
In Closing
Each disability policy is different, and understanding what you have or need is not a simple task. If you would like to review your existing disability coverage or lack thereof, we are here to help. At Lundeen Abrams Advisors, we regularly help clients plan for various aspects of their financial lives outside of retirement, which includes evaluating disability insurance. When you are ready, please give us a call and schedule a time to talk with us soon!
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