Disability insurance

Jun 3, 2020 | Did You Know

Regular pay for regular work.

If you’re employed, you might have some kind of long-term disability insurance through your company group plan. And if you’re self employed you may own your own personal disability insurance.

In both cases, the definition that insurance companies use to describe your occupation, or said another way, “the work you do” is very important and may decide whether you continue being fully covered during a disability, or be denied some benefits and required to do some other kind of work. Like sweeping floors.

If you purchased disability insurance privately, you probably had to choose between an obscure definition called “any occupation” vs “regular occupation”.

Simply stated, when a disability plan covers you for regular occupation it means that you’re regarded as totally disabled when you are unable to work at your regular job you were employed to do.

Conversely, with “any occupation,” total disability means the ability to perform the duties of any job, which includes the one you had prior to disability or any other job deemed possible by your employer. That means that if you become disabled, but you could perform a less demanding job, you may not get the benefits you’ve paid to receive.

Less expensive plans may offer “regular occupation” coverage for the first two years of the benefit period and then switch to “any occupation” after that. Be aware.

To figure out whether you have the right coverage, contact your company’s HR department—if there is one—or your office manager. If you have a personal plan, review the plan language with your financial advisor.

A good plan covers at least 60% of your pay in the event of an accident or illness that prevents you from working. If you don’t have children and little or no debt, you likely could get by on a policy that pays 40% to 50% or your pre-tax salary. Often in cases such as this, a critical illness policy can be a more effective strategy.

When evaluating your disability plan, keep in mind that many plans include a cap on benefits. For instance, your plan may cover you up to $3,000 a month. If you’re earning more than $60,000 a year, you may not have enough coverage. If your income increases to $80,000 annually, you would still only get the $3,000 a month maximum, which amounts to only 45% of your pay.

Also, if you earn a high income of $100,000 plus, you may want to consider a private disability plan to supplement your employer group benefits plan. The reason is because payments received from most company group plans are taxable while private disability insurance plans are received tax-free.

So remember, while potentially boring, sweeping floors is still a job. Regular occupation is better than any occupation. And 60% tax-free income is more than 60% taxable income.

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