Individual disability insurance can cost less than the price of one drink a day at a famous coffeehouse chain. "Investing” less than your smartphone bill costs you today will, among other things, help you keep your smartphone in the event you become disabled.
For a quick illustration, an overweight male smoker in his early 40s with an annual gross salary of $50,000 working in the construction industry could pay premiums of about $100 a month for disability benefits sufficient to replace his take-home pay for 5 years (after a 180-day Waiting Period or deductible). (The above illustration is based on rates from two companies, The Standard and Assurity Life.) As you would expect, non-smokers and people in less hazardous occupations could buy the same coverage for a lower premium.
What are the benefits?
As you will read below, government disability benefits are capped well below $3,000 per month. For many people New Jersey Short-Term Disability and Social Security Disability benefits simply are not enough to match their pre-disability after-tax income. These government programs have small maximum benefits that are geared towards people making gross $40,000 - $55,000 a year or less. Even if you don’t consider yourself a high-earning person, you may find it difficult to live on those government programs while coping with the pain and emotional distress of a disability.
But with a private individual disability policy, you can collect benefits roughly equal to your pre-disability after-tax income, no matter how high it was. Private disability insurance underwriters can consider your salary, commission, and bonus, as well as any self-employment net income, when figuring the maximum benefits of the policy you apply for. Monthly benefit amounts up to $30,000 are available if you qualify based on income (in this example, $30,000 a month after-tax disability benefits would be roughly equivalent to a $600,000 gross compensation from working.)
If you’re an optimist, and we hope you are, probably the most compelling reason to buy disability income insurance is that it gives you the financial freedom to stay home and rest or otherwise go easy on yourself during a period of convalescence. Doing so has been shown to improve the odds of a fuller recovery. Since disablement is no fun at all, why prolong it or risk re-aggravating the cause by rushing back to work too soon? Remember, many disabilities are not permanent unless they are mismanaged. According to the Council for Disability Awareness, disabilities on average last
between 2 and 3 years. Have you saved up enough to get
by comfortably for that long without income from working?
Self-employed? Own a small business? Worry about
how you will cover your overhead if you become disabled?
Well for that there’s Business Overhead Expense Disability,
a specialized individual disability policy on you, the owner, that pays to keep the lights on and the payroll funded so your business is still there when you get better! You’ll still be your own boss and won’t have to work for someone else.
And if you are already covered by a Group Long Term Disability plan at work, you can still supplement it with an Individual policy since many employer-sponsored Group Disability policies only pay 60% of your salary. For you to be fully covered, disability insurance benefits should replace 60% of your total gross pay, meaning that any commission and bonus you earn also needs to be taken into account.
And if you are among the highly-paid executives of the company, you may discover to your surprise that your employer’s group disability plan’s benefits are capped at a dollar maximum of $5,000 or 10,000 a month, which would be far less than 60% of your total gross pay. Finally, whatever percentage of the premiums of the Group Disability policy the company pays, that same percentage of the benefits would be subject to Federal income tax and FICA and consequently withholding of taxes by the insurance company.
2. Duration. First you have to wait. Again, Your Social Security Statement tells you, “If you become disabled before full retirement age, you can receive disability benefits after six months…” Plus Social Security says elsewhere, “It can take a long time to process an application for disability benefits (three to five months).” Not to mention the time spend spent waiting in long lines or on hold!
What causes disability?
According to WebMD, "Many people assume accidents are the most likely cause of disability. But they are actually the cause of less than 10% of disability cases." The real culprits include, prominently:
Mental health issues
Trust Beacon to guide you in selecting a suitable policy, whether you are interested in Life, Disability, Auto, Homeowner's, Annuities, or Business Insurance.
1. Definition. According to your Social Security Statement (which we’ll show you how to obtain below), Social Security defines disability as “a physical or mental impairment that's expected to prevent you from doing "substantial" work for a year or more or result in death.” That very strict definition makes it hard for a lot of people to qualify. So “if you can be expected to adjust to other work that exists in the national economy,” you won’t qualify for Social Security disability benefits. Take a moment and read about Step 5 in Social Security’s assessment process at this link.
You have health insurance and life insurance. Great! But what happens if you are too sick to work? Individual disability insurance benefits can make up for lost income so you can focus on healing, and worry less about paying the bills. Now we can't save you from a disabling injury or sickness. But with our help you can plan for the worst so at least you won't have financial heartache on top of your other woes.
Why Government Disability Programs aren’t enough
In New Jersey, temporary disability insurance is provided by the State and is mandatory for all employees. Your employer automatically deducts the premiums from your paycheck, a relatively modest $120 for the year! (And your employer is required to make a “matching” contribution that is slightly more than what you pay.) Here is a brief brochure from the State describing how it works. And you can find the current payroll tax rates here.
Moreover, accidents are less than 25% of disability cases when you factor in on-the-job accidents and car accidents, which by the way are only covered up to low maximum benefit amounts by Workers Comp and part of the PIP coverage in No-Fault Automobile insurance, respectively. Here are some sobering statistics concerning some kinds of Sickness that cause inability to earn an income: - 7 out of 8 people survive the first stroke but it’s the leading cause of permanent lifetime disability - 2 out of 3 people survive the first heart attack
- Over 55% of cancer patients are alive 5 years after first being diagnosed - Diabetes was declared a national epidemic in the late 1990s
Individual disability insurance benefits help “bridge” the “income gap” between what you earned before the disability and what you would receive in government benefits and/or group disability benefits from your last job.Unfortunately it is not possible to bridge the income gap completely, that is, pay you combined benefits that replace the full 100% of your pre-disability income. Some are concerned that you would then have no financial incentive to stay healthy. We don’t share their cynicism but we also don’t make the rules.
Beacon Insurance Agency can help you be prepared through providing affordable coverage from any of the following great companies:
Guardian (Berkshire Life)
Mutual of Omaha
3. Amount. Sign in to your account at Social Security to viewYour Social Security Statement. Under “Your Estimated Benefits” it should tell you about how much your Social Security disability payment would be per month. It can be different for each person depending on his or her history of Taxed Social Security Earnings, which are shown on page 3 of the Statement. Also note the disclaimer on Your Social Security Statement: “We can't provide your actual benefit amount until you apply for benefits. And that amount may differ from the estimates…” But according to Beth Laurence, J.D., “Most SSDI recipients receive between $300 and $2,200. The average SSDI payment in 2014 is $1,148. The maximum disability
benefit in 2014 is $2,642.” Social Security also offers a calculator at this link.
4. Taxation. "Some people have to pay federal income taxes on their Social Security benefits." You can find a short explanation at this link (Tax laws are constantly changing so always check with your CPA or tax attorney!)
The Social Security definition of disability "excludes many workers who qualify for private disability benefits." When one insurance company analyzed their claims data they found that after one year, 40% of their disabled clients had not qualified for Social Security disability benefits. And after five years almost 20% still hadn’t qualified! This company’s experience reflects something else that many newly-disabled persons are finding out the hard way: even when your claim is valid, it can take a long time for Social Security to process it!
Then there’s the money, which may be a lot less than you and your family are used to living on.
Summary Let’s list the Government and social disability income programs:
-New Jersey State Temporary Disability
-Social Security Disability
-Workers Compensation disability
-no-fault Auto disability, e.g. Additional PIP
Are they better than nothing? Absolutely! They may even be very good protection for the price, for the people who suffer enough misfortune to qualify for them. But they all share one major drawback which is that they have low maximum benefits. And each of them has other drawbacks too, which we’ve already mentioned elsewhere on this page.
That leaves one other source of disability income for you:
-employer-sponsored Group Disability
And as we’ve discussed above, it has restrictions that may strike you as drawbacks too. So in conclusion, it is a prudent financial planning decision to consider private individual disability insurance to protect your lifestyle, and that of your dependents. Remember, it took you a long time to accumulate whatever savings you have now and you would be shocked at how quickly you could spend it all down if you had an uncovered or inadequately covered period of disability. Preserve your family’s hard-earned lifestyle and savings.
Let Beacon Insurance Agency talk to you about individual disability insurance from some great companies!
There are a few things to be aware of with the New Jersey Temporary State Disability Program (NJSTD):
1. Definition. "Cash benefits are payable when you cannot work because of sickness or injury not caused by your job." So this is different from Worker's Compensation, which covers you when you get hurt on the job. (All employers are required to carry Worker's Compensation Insurance.)
2. Duration. New Jersey State disability benefits are short-term, that is, you can only collect them for 26 weeks. If your disability lasts longer than that, you would be looking at a Social Security disability claim (see discussion of Social Security below).
3. Amount. New Jersey State disability benefits only pay you two-thirds or 67% of your pre-disability wages, up to a maximum payment of $595 per week. More details here.
4. Taxation. New Jersey State disability benefits are subject to both Federal income and Social Security (FICA) taxes, but only on the portion attributable to the employer’s contribution. The IRS has a useful FAQ here.
New Jersey State disability benefits are not subject to New Jersey state income tax. (Tax laws are constantly changing so always check with your CPA or tax attorney!)
So if your weekly paycheck was $892.50 (which comes out to an annual salary of $46,410), you would get the maximum New Jersey State disability payment of $595 every week. But if your weekly paycheck was $1,000 or $2,000 or even $5,000, you would still only get $595 per week from the State. Lots of people can get by on $595 a week. With a little belt tightening, maybe you could too. But our experienced specialists at Beacon Insurance Agency want you to know, you don’t have to tighten your belt that much! Coping with a disability is hard enough as it is without having to worry about money as well. With affordable individual insurance to supplement the NJ state program, your combined disability payments will be significantly larger.
- during the first 12 months of the Benefit Period (which comes after an Elimination Period that you choose, much like you would choose a deductible), New Jersey law requires that private disability insurance policies define “total disability” in a way that is at least as favorable to you as the following: the inability to perform the duties of your own occupation. Beyond the 12th month of benefits NJ law allows the policy to switch to a less favorable definition (for example, inability to perform the duties of any occupation for which you are suited by your education) but some insurance policies stick with the original better definition anyway! These favorable definitions make it much more likely that you would qualify under private disability insurance than under Social Security Disability (see discussion below of Social Security’s very restrictive definition).
-Non-cancel-able means the insurance company can’t cancel or change key provisions unilaterally or raise the premiums for any reason. Period. Many insurance companies don't offer non-cancel-able policies, but ones that do charge significantly more for it.
-Guaranteed renewable to retirement age (typically 65 years old) regardless of any personal health changes or claims. Premiums can increase every year, but only based on the company's experience for the entire pool of insureds and subject to approval by NJ Department of Banking and Insurance (DOBI). Your deteriorating health or filing a disability claim is not going to raise your premium at renewal.
-Guaranteed option to increase the benefit amount as your income increases,
-Guaranteed option to increase the benefit amount as your income increases, without having to prove continued good health
-Cost of living adjustment (COLA) rider: during the Benefit Period a COLA kicks in every year that you remain disabled until you use up the policy’s maximum benefit. In other words, this rider keeps your benefits current with inflation from the time you start collecting benefits right up until you use them up fully.
-Benefit Period: Maximum length of disability covered for benefits range from 1 year, 2 years, 5 years, 10 years, to age 65, 66, 67, or for your lifetime.
-Private individual disability insurance (DI) policies do not reduce the base amount of benefits they pay to you just because you collect (or can collect) from other sources such as NJ Short Term Disability, Social Security Disability (SSD), employer-sponsored group disability, or Auto PIP disability. And most individual DI policies do not reduce the base amount they pay to you even if you are also collecting disability under Workers Compensation. -Social insurance rider. This rider pays an additional amount of benefits over the base benefits to the extent that you are not able to collect from other sources such as Social Security Disability (SSD) or Workers Comp, up to a pre-specified monthly benefit dollar amount.
-Lump sum “bonus” payment when you reach retirement age to help make up for all the years that your disability prevented you from contributing to a retirement plan such as a 401(k)
Private disability insurance benefits don’t reduce your government benefits. Receiving private disability benefits will not reduce your New Jersey State disability benefits if you paid the premiums yourself (and your employer did not contribute at all). And according to the Social Security Administration, “Disability payments from private sources, such as private pension or insurance benefits, do not affect your Social Security disability benefit.”
…but getting your claim approved for Social Security Disability may reduce your private group disability benefits (i.e., from your last job). Good news though: Individual disability insurance benefits are usually not reduced by Social Security disability payments (exception: Social Insurance Rider discussed above).