The Individual Need for Disability Insurance

Many people believe that their biggest asset is their home. For most of us, our biggest asset is the ability to work and earn an income. Not being able to work - due to a job loss or a disability having taken away the ability to work - is often financially devastating.

Everyone who works for a living is very familiar with what can happen if they are fired. On the other hand, the possibility of becoming seriously disabled is a risk few seem to think much about. I-low likely is it that you will become disabled? According to one study, 30% of all Amen cans between the ages of 35 and 65 suffered a disability lasting at least 90 days. The risk of disability is real. The question is, "What to do about it?"

Don't Count on Social Security

A few individuals do manage to qualify for disability benefits from Social Security. However, the Social Security definition of “disability" is so strict that over60% of initial claims are rejected. Obviously, something else beyond Social Security is needed.

Group Disability Insurance

For many, the real solution to the disability problem is individual disability income insurance. Although individual policies may cost you more, as long as you pay the premiums the benefits are not taxable. Plus, an individual policy allows you to tailor its terms to fit your own needs. Factors to consider when shopping for an individual disability policy include:

• Company strength: You need to know if the company is financially sound.
• Definition of disability: Look for a policy that defines disability in the broadest terms possible. Some policies will permit you to work in a different occupation and still collect disability benefits.
• Elimination period: How long must you wait before disability payments begin?
• Benefit period: How long will you need coverage? Both short-term and long-term disability benefits are available.
• Inflation protection: Try to find a policy that adjusts benefits for inflation.

The Business Need for Disability Insurance

Self-motivated individuals frequently play a crucial role in the success of a business. This is particularly true of small businesses in which one or two talented people possess highly specialized skills or knowledge that other employees do not have. If such a "key" person were to suffer a long-term disability, not only would the individual face substantial financial risk, but the very survival of the company could be in jeopardy.

Although sole-proprietorships and partnerships are generally the most vulnerable corporations, particularly corporations built around one or two individuals, are also at significant risk. However the business is organized, when you consider the likelihood that you or one of your key employees may become disabled, there is a clear need to protect both your personal income and the financial well-being of the company.

Options to Consider

There is no single strategy or type of policy to protect your business from the risks posed by a key employee's disability. Like a puzzle, a number of pieces are needed to complete the picture:

• Adequate cash reserves: Liquid funds can cover a short-term disability.
• Key employee disability insurance: Pays income to a disabled key employee. Generally, if the employer pays the entire premium, disability benefits are taxable income to the employee.
• Business overhead expense insurance: This type of insurance covers normal operating expenses such as employee salaries, equipment leases, utilities, rent, advertising, maintenance, etc.
• Qualified sick pay plan: The federal tax code prohibits a business owner from paying himself (or herself) a salary while disabled, and then deducting the payments allowable business expense. A formal, written qualified sick pay plan (also known as a salary continuation plan), established in advance, can provide for funding the disability benefits as well as maximizing the tax benefits.
• Disability buy-out: In the event that you or another owner of the business suffers a permanent disability, disability insurance can be used to fund a buy-sell agreement.

Seek Professional Guidance

The advice and counsel of knowledgeable tax and insurance advisors are essential in preparing for the potential impact of disability on a business.

The Impact of Disability

While most Americans insure their lives and physical possessions such as their homes, cars, etc., many overlook the need to protect their most valuable asset the ability t6 earn an income.

How likely it is that someone will become disabled? The table below developed using data collected by the federal government shows the number of working-age Americans who have a disability that affects their daily lives.

Individuals with Disabilities by Age

Sources of Disability Insurance

There are two primary sources of private disability insurance:

• The individual purchases the policy directly from an insurance company. The terms and benefits of the policy can vary widely.
• Group plans are typically purchased through your employer and generally offer a low-cost alternative to individual coverage. The terms and coverage will vary.

Government-Sponsored Disability Insurance Programs

• At the federal level, there are a two primary programs offering disability insurance. Both are administered by the Social Security Administration.
• Social Security Disability Insurance (SSDI) pays benefits to qualified individuals under the age of 65 regardless of current income. Benefits are based upon your Social Security earnings history.
• Social Security Supplemental Security income (SSI) pays benefits to qualified individuals who are either over 65, blind or disabled, and with limited income. Benefits are not related to the individual's record of Social Security earnings.
• The Department of Defense and Veterans Administration offer military service members and veterans disability compensation for service-related health problems. In addition, federal employees covered under the Federal Employees Retirement System (FERS) are eligible for benefits if they have at least 18 months of service, and are unable to perform their job because of injury or disease.
• All states and the District of Columbia have workers’ compensation laws that provide disability compensation to employed individuals who get sick, become injured, or who are killed on the job. Although most workers are covered, states laws vary dramatically as to who is excluded and to the amount of benefits paid.

A Word of Caution

Neither of the above programs offered through Social Security covers partial disability and both have a strict definition of what it means to be disabled. In fact, over 60% of initial claims for Social Security disability benefits are denied.

For more information, please contact us.