When we think about financial security, many of us consider health insurance, retirement plans, and emergency savings. One of the most overlooked pieces of the financial puzzle is long-term disability insurance.
If you’re fortunate enough to have group long-term disability (LTD) insurance through your employer, you might assume you’re fully covered. But is it really enough to protect you and your family if the unthinkable happens?
Although you may already have LTD through an employer group plan, certain professionals may wish to purchase additional private coverage. Let’s explore how to determine the right amount of LTD coverage and why supplemental policies might be necessary for higher earners or those with complex financial needs.
Long-Term Disability Insurance: Employer-Sponsored vs. Private Policies
LTD insurance is designed to provide financial protection if you’re unable to work for an extended period due to illness or injury. It typically replaces a percentage of your income—often around 50% to 80% of your base salary—and kicks in after a waiting period, usually 90 to 180 days.
However, there are two different models for this coverage:
- Employer-sponsored or group disability insurance: As part of their benefits packages, many employers offer group disability insurance plans. Claims involving employer-sponsored plans are typically controlled by ERISA, a federal law.
- Private or individual disability insurance: Policies that individuals purchase on their own from a disability insurance company. State laws control claims involving these policies.
Both types of long-term disability insurance pay monthly benefits to people who meet the plan or policy’s definition of disability. However, you have a lot more control over the benefits, terms, and conditions of a private policy.
What Does Long-Term Disability Insurance Cover?
| Employer-sponsored plans | Individual disability insurance policies | |
| Monthly income loss | Most plans replace a percentage of your base salary. Bonuses, commissions, and other income sources are usually excluded.
|
You might be able to include certain commissions and other income sources in your claim, depending on the terms of your policy.
|
| Disability | Many group plans use an “any occupation” definition of disability. That means you must prove you cannot do any type of work to qualify for benefits.
|
For a price, you can opt for “own occupation” or “own specialty” coverage, which can make it easier to prove your claim.
|
| Partial disability | Partial disability claims are rarely covered.
|
Some policies offer partial benefits if you can work part-time or in a limited capacity.
|
| Pre-existing conditions | After an elimination period or waiting period, pre-existing conditions are often covered.
|
Your policy might exclude certain pre-existing conditions, depending on its terms.
|
| Mental health conditions | Many plans limit benefit payments for mental health and self-reported conditions to two years. | Some policies will cover mental health and more subjectively diagnosed conditions until retirement age. |
Disability insurance plans and policies can vary dramatically. It’s important to carefully read and understand exactly what your policy covers and excludes. Understanding the policy’s definitions, exclusions, and caps is crucial, particularly if your financial obligations rely heavily on a steady income.
RELATED: What Do Own Occupation and Any Occupation Mean in Disability Claims?
Common Issues with Group LTD Insurance
While group LTD insurance is a valuable benefit, it’s important to understand its limitations. Many people mistakenly believe that their employer-sponsored disability coverage is sufficient, only to discover its shortcomings when they need it most. For individuals with higher incomes, these limitations can create significant financial risks.
Taxes
While a 50% or 60% income replacement might sound significant, consider this: if your annual salary is $200,000, a 60% benefit translates to $120,000 per year. That might sound manageable until you account for taxes. Group LTD benefits are often taxed, especially if your employer pays the premiums. This could reduce your take-home benefit by 20% to 30%.
In comparison, private LTD benefits are not usually considered taxable income. (Assuming that you paid your own insurance premiums with after-tax dollars.)
Benefit Caps
Most group LTD policies impose a maximum monthly benefit, such as $5,000 or $10,000. High earners can easily exceed this cap, leaving a significant income gap. For example, if you earn $300,000 annually, a $10,000 monthly cap would cover only 40% of your salary—before taxes.
Coverage Ends with Employment
Group LTD insurance is tied to your job. If you switch employers or are laid off, your coverage ends. This can leave you vulnerable if you develop a disabling condition before securing new insurance.
How Much Disability Insurance Do I Need?
Your financial situation and goals are unique. However, if you have significant financial obligations or a higher income, you might want to consider supplementing your group disability insurance coverage with an individual policy.
While it’s always best to consult with a financial planner, here are some factors to consider when assessing your coverage needs:
Calculate Your Monthly Expenses
Start by creating a detailed budget that includes:
- Mortgage or rent payments
- Utilities and other monthly living expenses
- Insurance premiums
- Education costs (e.g., school tuition or college savings)
- Retirement contributions
- Healthcare costs, including specialized care and caregiving expenses
- Tax payments, including taxes on your group long-term disability benefits
Identify Your Sources of Income
You should also consider your financial resources and sources of income that you might have. This could include passive income from investments and Social Security benefits. While these resources might not be enough to maintain your current lifestyle, they are still an important part of your calculations.
Please note that Bryant Legal Group does not handle standalone Social Security claims.
Will Your Group Disability Plan Protect Your Financial Goals?
If your disability insurance benefits and other sources of income will not help you maintain your lifestyle, it’s a good idea to consult with a financial advisor. They can help you build a plan that protects your long-term financial interests, which might include a supplemental, individual long-term disability policy.
RELATED: Long-Term Disability Resources for Financial Advisors
Benefits of Supplemental Private Disability Insurance
If your group LTD coverage falls short, a supplemental individual policy can provide:
- Higher benefit amounts. Individual policies might replace more of your income, including bonuses and commissions. You can also add cost-of-living (COLA) riders to help you maintain your lifestyle and deal with inflation.
- Tailored coverage. Individual policies can include own-occupation definitions, longer benefit periods, and higher benefit caps.
- Private policies stay with you regardless of job changes, providing consistent protection throughout your career.
Why the Right Disability Insurance Coverage Matters
For some people, multiple disability insurance policies make financial sense. Here are a few hypothetical case studies to consider.
Case Study 1: The High-Earning Professional
Sarah is a surgeon earning $400,000 annually. Her employer’s LTD policy covers 60% of her salary but has a $10,000 monthly cap. When she develops a chronic neurological condition, her benefits amount to only $120,000 annually—a significant reduction from her previous income. Supplemental disability insurance allows Sarah to maintain her lifestyle and continue contributing to her retirement savings.
Case Study 2: The Business Owner
James owns a successful consulting firm but relies on his group LTD policy. When he develops a chronic illness, he discovers his group policy’s benefits are taxable and inadequate to cover both personal and business expenses. A private policy bridges the gap, ensuring his business survives and his family’s needs are met.
Still Have Questions About Disability Insurance? Contact Bryant Legal Group
Employer-provided group LTD insurance is an excellent starting point for disability protection, but it’s rarely enough to cover all your financial needs—especially for high-income professionals. By understanding the limitations of your policy, calculating potential income gaps, and exploring supplemental options, you can determine the right amount of coverage for your situation.
Supplemental private disability insurance is more than an added expense; it’s an investment in protecting your future, your family, and your financial goals. Consult with an experienced advisor to craft a comprehensive coverage plan that ensures peace of mind no matter what life throws your way.
And if you have questions about a disability insurance claim, contact the team at Bryant Legal Group.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.
The post How Much Long-Term Disability Coverage Do I Need? appeared first on Bryant Legal Group.