The Importance of Disability Insurance Among High-Earning Professionals
If you work for a living, your most valuable asset is not your house, vehicle, or even what’s in your bank account; it is your ability to continue generating income. And for high-income earners who are typically knowledge workers, this asset is even more vital.
Your specialized skills, expertise, and experience are not easily replaceable, and a temporary or permanent work stoppage can not only disrupt your income but can also affect your long-term financial security. As a high earner, your income influences your lifestyle. Disability insurance ensures that you can cover most of or all your monthly expenses without draining your savings or incurring debt.
For most, when disability insurance is referenced, they envision a popular, animated, one-liner duck visiting a hospital patient in dire constraints. They then picture said patient engaging in dialogue about how, thankfully, that companion duck was available and accessible during their unfortunate time of need.
Disability insurance, however, is not about covering the medical portion of any accident or illness. Its sole function is to ensure your income is protected in the event you are unable to work due to a disability.
Short-term and long-term disability insurance are both valuable tools for income protection, but they serve different purposes and have distinct characteristics. While the expected monthly benefit allowance between the two varies, at a minimum, the disability insurance policy should provide you with enough income to supplement your basic living expenses. For added coverage, having both short- and long-term disability insurance policies in place at the same time is recommended and certainly has its benefits.
Short-term disability insurance is designed to cover disabilities that are expected to last a few weeks to several months, such as recovery from surgery or a brief illness. This type of insurance provides immediate income replacement, with elimination periods typically ranging from 0 to 14 days, ensuring that benefits start soon after the disability occurs.
Contrarily, long-term disability insurance is intended to provide coverage for disabilities that extend beyond the short-term policy’s maximum coverage limits, such as serious injuries or chronic illnesses. The elimination period for long-term disability policies can sometimes be as long as 360 days, which extends far beyond the short-term period. Long-term disability policies are designed to kick in once short-term options have been exhausted and, depending on the policy, can provide benefits for several years or even until retirement.
While many employers offer short-term disability coverage as part of their group benefits package, very few offer long-term disability coverage. And for those that do, keep in mind that coverage only applies for the duration you are employed. If you switch employers, you will likely forfeit that coverage, but by having your own long-term policy and using your job’s short-term policy simultaneously, you are covered on both ends. In tandem, both policies offer more protection.
Thus, when it comes to choosing whether to get disability insurance through your employer or purchasing it on your own, there are a few things to consider. Employer-sponsored plans are often more affordable and convenient, but they may not offer the level of coverage you need.
Purchasing an individual policy, however, affords the insured with control of all desired features. This can include term length, income replacement percentage, elimination period, and cost of living adjustments. This is especially true among high-income earners as group insurance plans offered in the workplace often have upper limits that may not replace enough of your individual earnings.
Deciding how much insurance you need can be a bit tricky. However, a good rule of thumb is to aim for coverage that will replace 60%-70% of your after-tax income. This is because disability benefits are typically tax-free if you've paid the premiums with after-tax dollars. Conversely, benefits from a short-term group disability policy provided by an employer are subject to taxation.
The most important aspect of selecting your disability coverage revolves around the policy's definition of a disability. Each policy and insurance carrier has a specific definition of what qualifies as a disability for receiving benefits. For instance, there are distinctions between the definitions of "own-occupation" versus "any-occupation” disability. The former provides coverage if you are unable to perform the occupation (or the tasks of the job for which you were trained), while the latter only provides coverage if you are unable to perform any reasonably suitable occupation.
Various levels of disability may also be defined (e.g., partial disability) which may qualify you for a percentage of your total benefit amount. Understanding these definitions is essential for choosing the appropriate disability insurance policy that aligns with your specific needs and profession.
No matter your age, occupation, or tax bracket, opting for disability insurance is a great way to safeguard your income against a life-altering disability, devastating illness, or even a global pandemic. In fact, according to the social security administration, one in four 20-year-olds will experience a disability for 90 days or more before they reach age 67. With those odds, events like these are nearly impossible to predict; however, they are not impossible to plan for.
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Malcolm Ethridge, CFP® is an Executive Vice President and fiduciary Financial Advisor with CIC Wealth Management, based in the Washington, DC area. He is also the Managing Partner of Capital Area Tax Consultants.
Malcolm’s areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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Disclosures:
CIC Wealth, LLC does not provide legal or tax advice. Be sure to consult with your tax and legal advisors before taking any action that could have tax consequences.
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