Disability Insurance

Disability Insurance is insurance for your income if you become disabled and not able to work. Most people have coverage through their work in the form of short-term group disability and long-term disability.

The coverage is usually paid in full or partially by the employer. The short-term kicks in after five sick days to start the 30 to 90-day benefit period. That is when the long-term disability benefit period starts and can pay to age 65/67. The short-term pay is typically 50% of salary and long-term typically 60 to 67% of salary up to monthly cap between $6,000 to $8,000. 

This type of coverage works well for most people by providing affordable coverage to replace most of their income. Another advantage that group coverage is underwritten guaranteed or simplified issue. Guaranteed issue means that the employee is covered automatically, providing they work the minimum hours set in the plan. They do not have to answer health questions or have an insurance exam completed. Simplified issue the employee is covered if they meet the minimum working hours set by the plan and answer a few health questions. (The answer to the questions can trigger additional underwriting.) 

The higher earners in the company that usually includes the management owners group coverage can leave them underinsured. As an example, an executive earning a salary of $192,000 annually or $16,000 per month for their long-term group disability will cover 67% of salary up to a cap of $8,000 per month. The executive only has 50% of the salary covered. That leaves the other half of their income not covered. An individual disability policy can be placed on top of the group policy to cover the income over the group cap. 

Typically, the individual policy will cover the additional percent to bring the coverage percent in line with the rest of the employees in the company. For this example, the individual policy would be for 17%. It is a lot less expensive to purchase an individual policy covering 17% than 67%. The policy is portable and can offer increased coverage if the executive income increases. These policies require full underwriting and can have exclusions for past medical issues. That is one of the drawbacks of this approach. 

This approach can benefit small business owners by lowering the cost of a large individual policy and providing their employees with a long-term disability policy too. There are care carriers that will offer group coverage on firms that have as few as five employees.