Limitations of Employer-Provided Disability Plans

You say your employer provides you with disability insurance, so why do you need to buy your own policy? Here are some typical limitations of disability income insurance plans provided through an employer:

• They may pay only a percentage of your base salary; for instance 60%. Most income earners, regardless of income level, have spending commitments that consume between 65-75% of normal cash flow.
• They do not cover incentive compensation such as profit sharing contributions, deferred compensation, commission income or regular incentive bonuses.
• Benefits paid out are taxable income to the employee.
• Benefits paid are often offset by Social Security disability benefits received.
• Employer policies often have maximum monthly payout caps.
• The benefits scale runs to a top base salary of $100,000. This means anyone making more than $100,000 in base salary who becomes disabled receives a reduced benefit.

Some employees mistakenly believe that the government will fill in any gaps left by a company plan. Social Security disability benefits, however, are only intended for long-term, total disabilities. For this reason, the Social Security Administration denied more than 63% of all initial application requests in 2004.*

Clearly, everyone who relies on a paycheck needs to assess how long he or she could meet their financial obligations if they were unable to work. Key considerations include groceries, mortgage payments, taxes and other basics.

Most experts agree you'll need a policy that covers at least 60% of your gross income for as long as you can't work. Why just 60%? Because most people pay their disability premiums with after-tax dollars, the benefits they receive are tax-free.

If additional disability income coverage is needed, a financial representative can help you determine what type of supplemental policy would be appropriate. Underwriting rules by insurance companies often dictate how much coverage is available to an individual, but the wide variety of policies available can suit many different income levels and budget requirements.

By protecting your assets against the unexpected, you're prepared, no matter what path life takes.

*Social Security Online: Disability Programs:
http://www.ssa.gov/disability/disability_process_welcome_2004.htm