Basics of Disability and Life Insurance

By: Becky Eason, CFP®

The Basics of Disability and Life Insurance

By: Becky Eason, CFP®

A personal catastrophe is something that no one wants to think about. Most of us go through life with the mentality of “it won’t happen to me,” but unfortunately at some point in your life you will likely be impacted by an accident, disability or premature death of yourself or a loved one. Obviously this quickly becomes a very emotional, stressful and overwhelming time and the last thing you want is added stress of wondering how you are going to pay your bills while continuing to take care of yourself and loved ones. This is where the importance of having adequate insurance comes into effect.  Now stay with me, this isn’t a sales pitch and we don’t sell any insurance products. 

The purpose of disability insurance is to supplement lost wages in the event that you are no longer able to work. Alarmingly, according to the CDC, it is estimated that 1 in 4 adults in the U.S have a disability or will become disabled at some point. Therefore, disability insurance is a very important insurance, but not everyone needs it. If you are one of the many who depend on your paycheck to pay your bills then there is a good chance that you need disability insurance. Some cases when disability insurance isn't needed include: 1) if you have sufficient assets saved that can be used to pay for your living expenses, 2) if you have another household member who has an income and you are able live solely off their income, 3) or you are retired. Disability insurance comes in the form of Social Security Disability Insurance, Short Term Disability, and / or Long Term Disability. 

• Social Security Disability Insurance (SSDI) is a federal program that pays benefits if you meet certain criteria. In order to be eligible for SSDI your medical condition must be expected to last longer than one year or result in death and you must have worked a required length of time to have accrued benefits. 

• Short Term Disability (STD) is a common employee benefit, or it can be purchased as an individual policy. Generally, a Short Term Disability policy pays a certain percentage of your current income for a period of three to six months. Every policy has a specified coverage dollar amount and benefit period. There is usually also a waiting or elimination period before you can start collecting benefits. This time frame generally ranges from one to fourteen days.

• Long Term Disability (LTD) is also a common employee benefit, or it can be purchased as an individual policy. Long Term Disability generally kicks in after your Short Term Disability benefit period is over and can last anywhere from three to ten years. The period of time that you’re on Short Term Disability will usually serve as your waiting or elimination period, but not always, so make sure to check your specific policy. The qualifications to meet long term disability tend to be more strict than with Short Term Disability because unless you have a specific “own occupation” policy you may have to be deemed unable to perform any job. Own occupation disability insurance covers your disability if you are unable to perform the job requirements of your specific job that you were trained to do. This type of insurance is more expensive than general disability coverage, but it is common for highly specialized careers, such as doctors. 

You might be wondering if your disability benefits are taxable income or not. And the answer depends on how your premiums were paid.  If your premiums have been paid with pretax money then the benefit is taxable to you. If your premiums have been paid with post tax money then the benefit is not taxable. When you have a private individual disability policy that is purchased outside of your employer then the premiums are being paid with post tax money, so these benefits would not be taxable. Some employers offer a post tax option for paying premiums too, so you will want to decide which way you would rather pay the premiums. 

Another common personal insurance is life insurance. Many people fear talking about death so they avoid the conversation around life insurance all together. As morbid as this conversation may be it’s a very important one to have, especially if you have family members who depend on you for financial support. As with disability insurance not everyone needs life insurance, but it’s fair to say that a majority of people do need some amount of insurance. There are many purposes of life insurance and the top one is to provide financial support for surviving family members in the way of wage replacement. If you have a premature death your surviving family members are going to continue having their own living expenses and your income will no longer be there to help pay the bills. The last thing that your survivors need during their time of grieving is additional stress about paying bills. Upon death there are also funeral or “final expenses'' that can add up to be $10,000 or more. Most people don’t have the funds to pay this out of pocket, so a life insurance policy can help cover the final expenses. 

A question you may be asking is “do I need life insurance?” Generally, families with young children have the greatest need for life insurance. Oftentimes stay at home parents or home makers are “forgotten” about in a life insurance analysis because they aren’t earning a wage. It’s really important to consider what their household contributions equate to financially. Homemaker’s might be caretaking for a child, disabled or elderly family member. If something happened to them and you had to hire help how much would that cost? Others who may need life insurance include business partners, individuals who support another family member, such as their parents, people who want to leave a legacy, and those who don’t have enough assets to cover final expenses and don’t want to place that burden on their family. Of course, there are many other people who may need life insurance, so it’s important to consider your individual case. As with disability insurance, life insurance is a very common employee benefit, but it can also be purchased as an individual personal policy. There are many forms of life insurance, but we’ll touch on group life, term and whole life insurance. 

• Group life insurance is employer sponsored life insurance and it commonly has a benefit of $50,000 or 2x salary but can vary based on the company. Some employers will also allow employees to purchase additional life insurance at a group rate, which could be cheaper than purchasing an individual policy to cover any gaps. Something to consider though is whether or not the policy is portable if you leave your employer. 

• Aside from group life insurance individual term insurance is usually the most affordable personal coverage that you can get. There are many different policy terms (lengths) available, but the most common are 10 years, 20 years, and 30 years. A term insurance policy gives you a specified amount of coverage for a specific period of time and then the policy ends and you don’t have any accumulated value.

• A whole life policy lasts for the policyholder’s lifetime and has both a death benefit and a savings component which can be invested. If you need to access the savings component you can do so by withdrawing it as cash, borrowing from it, or using it to pay part of your premiums. Because of the savings component and the extended time of coverage, whole life insurance has a higher monthly premium for your coverage than term insurance does. 

There are so many different options for disability and life insurance and everyone’s needs are very different so it’s important to know what you as an individual need or don’t need. While many people are underinsured it’s also possible to be over insured, in which case you are paying insurance premiums that aren’t needed and that may be preventing you from being able to fulfil other life goals. It’s important that you find someone to talk to who isn’t sales pressuring you into purchasing what you don’t need. 

Knock Knock - Open Enrollment, Who?

By: Rachel Poe

Open Enrollment is a time in which individuals are required to opt in or out of health, dental, and vision insurance for the upcoming calendar year. Those who receive benefits through an employer program will usually receive notification and be a part of a company census to gather quotes. While important in itself, it is also noted that, once open enrollment closes, so does your chance to change coverage for the upcoming years (unless you qualify for a life event change). Life event changes consist of some of the following: marriage, divorce, additional children, loss of job, movement from region, etc. 

Open Enrollment for 2021 generally runs from mid-October to mid-December for coverage that begins January 1, 2021.  According to Value Penguin, within individual households, it is important to review these insurance plans compared to 2020’s Affordable Care Act; plans may vary based on coverage and provider. In addition, depending on your state, individuals who opt out of health care coverage provided by ObamaCare will not be required to pay a tax penalty, however, it is important to check your state-level mandates. 

Duke Health offers the following tips to prepare during the open enrollment process.

1. Know your needs - chronic conditions, emergency options, upcoming procedures, risk analysis

2. Family Changes - college, study abroad, new family members

3. Know What’s Covered

4. Identify Your Provider Network

5. Calculate costs

6. Evaluate Health Savings (HSA) and Flexible Savings Accounts (FSA)

7. Consider Other Insurances

8. Don’t Ignore - even if satisfied with the current plan - always review!

WARNING, open enrollment is not the same as Medicaid and Medicare. As a reminder, Medicaid is put in place to aid in low-income households and disabilities. This has no enrollment period and can be applied for at any time. Medicare creates access for individuals 65+ to health care (disabled individuals can apply at a younger age). Coverage begins January 1, 2021 with open enrollment ranging from October 15, 2020 till December 7, 2020. 

While reviewing dental, vision, and health insurance needs, it is equally important to consider reviewing other needs such as long-term care, disability, and life insurances. See this attached pdf to review some questions that may help identify some of the needs, revisions, or gaps within upcoming insurance policies. 

Not sure where to start? Contact us today for a Discovery Call to schedule a Free Consultation to discuss if an employee benefits review and an insurance policy review and recommendation session is right for you!