Is the Disability Insurance Provided by my Employer Sufficient?

May 8, 2017

Q: I checked the box for disability insurance during my company’s benefits open enrollment, so I’m taken care of by my employer, right?

A: Many of us would like it to be this easy.  Check the box and move on.  However, we strongly encourage folks to take their time and think through what they are trying to accomplish. If you suffer an illness or accident and you are not able to earn the income you do today how would it impact your life? Would you still want to provide and/or enjoy what you are working towards today? Take the next two minutes to think it through. Better yet, review the impact on your current and future cash flows to see the impact. These are very important decisions that most people take lightly. Please, don’t assume that coverage through your employer will be sufficient. In fact, even the way in which disability is defined can limit your benefits.

“Own Occupation” vs. “Any Occupation”

“Own occupation” (or “own occ”) insurance means you are considered totally disabled if you can’t perform the specific duties of your own occupation.  

“Any occupation” means you are considered disabled only if you lack the ability to perform the duties of any occupation for which you are appropriately qualified.  

Even if you are injured and unable to do what you currently do for a living, you may not qualify for benefits under this definition of disability. As long as you are able to perform the duties of any occupation, you would not be eligible for claim with an “any occ” type of policy. A claim under this type of policy would only result from a total disability. Most employer provided coverage uses an “any occ” definition after the first 24 months of claim.

To illustrate the difference this can make, consider the example of a litigation attorney who develops an anxiety condition that is aggravated by the stress of preparing for and arguing cases in court. His/her health may not be threatened if, instead, he/she practices law outside of the court room. This means that unless he/she has an “own occ” specialty definition in the policy, the benefit will likely not be paid.  

Another consideration is the taxability of benefits should you need to draw income from a disability insurance policy. Many people don’t realize that to the extent your employer pays the total premium for the disability insurance policy and does not include the cost in your taxable income, the benefit is taxable to the employee. A disability insurance policy generally pays 60 percent of potential income lost each month. The benefit of the disability income is further reduced if it is deemed taxable income.

Also, the employer paid group plan may not cover executive-level compensation lost, such as gifting of company ownership, deferred compensation and restricted stock, due to disability.  

An employee may consider the addition of individual policy to supplement or “layer” on top of the group disability benefit to fill in the gap. In general, these policies can protect up to 60 percent of your earned income, filling the protection gap often created by the limits of an employer paid group plan. In addition, since these are individually owned policies, they are portable, meaning employees can continue the protection should they leave their employer.

There are a variety of considerations and nuances as it related to selecting disability coverage. Whether it’s the various riders associated with certain policies or the potential pitfalls that may not be apparent. It’s in your best interest to clarify your goals and what is most important so you can make an informed decision. 

Certain MWA representatives are licensed insurance agents and are compensated for the sale of insurance-related products through an affiliated insurance agency. The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. It is not intended to be personal legal or investment advice or a solicitation to buy or sell any security or engage in a particular investment strategy. Please consult with a tax professional. Mariner Wealth Advisors (“MWA”) is an SEC registered investment adviser with its principal place of business in the State of Kansas. Registration of an investment adviser does not imply any level of skill or training.  For additional information about MWA, including fees and services, please contact MWA or refer to the Investment Adviser Public Disclosure website.

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