Disability Insurance: Planning for a More Secure Future

Financial advisers can help their clients understand the need for disability insurance, find the best options and manage the costs.
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Disability insurance is often misunderstood. While almost everyone gets the need for life insurance, not everyone understands the importance of having disability insurance. Financial advisers have the opportunity to help their clients understand this important coverage Here are some thoughts on discussing this type of coverage with them.

Lifestyle Insurance

Disability insurance protects your client’s earning power should they become disabled and unable to work. It can help protect their lifestyle from a full or partial loss of income. As you well know, the probability of your clients becoming injured or disabled during their working careers is much higher than their probability of dying.

The odds are about three to five times greater that your clients will become disabled for at least 90 days or longer than the odds are of of them dying. Disability insurance can help bridge this gap in income during a period of disability.

Short- and Long-Term Coverage

Disability insurance typically comes in two varieties, short-term and long-term.

Short-term disability coverage typically provides income replacement for an injury or disability that lasts anywhere from 30 days to one year. The time frame will vary based on the policy. Short-term disability coverage is a common employee benefit, some employers offer it at no charge.

Long-term disability policies typically cover a disability that lasts three months or longer. This also includes a permanent disability that limits the covered individual’s ability to work on a permanent basis either in part or totally.

Workplace Coverage vs. Private Policies

For clients who are employed, many employers offer both short-term and long-term disability coverage as part of their employee benefits menu. It’s common for these policies to replace 50% to 60% of the employee’s compensation once the coverage kicks in.

This group coverage generally comes at a reasonable cost and will be sufficient for many of your client’s needs. However, some clients may have situations for which this type of coverage might not suffice. And of course, others might not have access to group coverage.

Group disability policies typically have a very broad definition of disability that often refers to the ability to do any sort of work. The policy might require your client to work at any sort of job they might be able to do, and then pay them for the difference in their salary from their old job and the new one. In an extreme case this might require a client who is used to white collar employment to work in a fast food restaurant to receive policy benefits.

Disability coverage purchased privately will often have a narrower definition of disability. For example, an oncologist will be considered to be disabled if they can’t work in their field or something extremely close to it. Same with an attorney and many other professions.

Group coverage may not cover some forms of variable income such as commissions or incentives that many salespeople or high level executives might count on as a key portion of their overall compensation. The group policy might limit the covered compensation to the policyholder’s regular compensation.

You and your client will need to shop around for the policy and the insurance company offering the coverage that best fits their situation. In general, the narrower the definition of disability, the higher the premium. Privately issued policies will as a rule be more expensive than group coverage.

Factors That Impact Cost

There are a number of factors that will impact the cost and even the availability of a disability policy for your clients. These include:

  • The elimination period. This is the waiting period until coverage kicks in. The shorter the elimination period, the higher the premium.
  • Definition of disability. As discussed above, a policy with a narrow definition of disability will cost more.
  • The client’s occupation may factor into the equation, especially if they work in a field that is more likely than some others to result in a disabling injury.
  • The client’s income, the higher their income the higher the premium as the insurance company would have to pay a higher benefit level for a disability claim.

Social Security Disability

Social Security offers disability benefits, but they are notoriously hard to qualify for. This is not something your client should depend on to cover them in the event of a disabling condition.

Determining the Right Solution

As with many aspects of the financial planning work that you do for your clients, helping them choose the right disability insurance for their needs is critical. Should a client find themselves disabled and unable to work for a prolonged period of time, this could be financially devastating without the proper coverage in place.