PLANNING FOR THE POSSIBILITY OF DISABILITY
No one intends to become disabled, but it happens. According to the Council for Disability Awareness, just over 1 in 4 of today’s 20-year-olds will become disabled before they would otherwise retire. (chances of disability - Council for Disability Awareness: Prevention, Financial Planning, Resources and Information (disabilitycanhappen.org)
Accidents are not the primary cause. Among the most common causes are: cancer, circulatory issues (heart attack, stroke) and mental health issues. (Disability Statistics; Chance of Becoming Disabled - DisabilityCanHappen.org) Based on my experience, diabetes and related conditions are also common causes of disability.
Not all sicknesses, or accidents and injuries, are work-related, which means that one cannot count on receiving workers compensation benefits for a disability. State Disability (SDI) might be available, but it may be limited to 52 weeks (1 year) of benefits. Social Security Disability Income might also be available, but there is often delay, not everyone is approved and benefits are often modest. According to SSA statistics, for example, the average SSDI benefit, as of February 2021, was $1,279.
Accordingly, the matter of what you would do for income if you were to become disabled before 65 or 67 is something to which you should give some advance thought.
One way a person can try to help protect themselves in the event of disability is to have long-term disability ("LTD") coverage. This is something of especial concern for high earners. Disability coverage typically covers disabilities from sicknesses, as well as from injuries.
There are two basic ways to obtain such coverage. One is to buy it oneself. It is usually referred as long-term disability insurance, or disability income insurance. Doctors and other high earning professionals often take this route.
Not all policies are the same. They may differ in important respects. Own occupation coverage is better than any occupation coverage, for example. What’s the difference?
Basically, own occupation coverage pays if you can no longer perform the occupation you worked at before you became disabled. With such coverage, the insurance company can’t argue that a doctor could be a file clerk. While “any occupation” coverage doesn’t literally mean any (other) occupation, it does give the insurance company more room to try to argue that the insured can do other things, such that he or she is not entitled to benefits. Any occupation coverages increases the likelihood of disputes.
Some policies change the definition from “own” to “any” after a period of time, like 2-5 years, so beware. Compare before buying, consider your needs and budget, and be aware that some insurers have better reputations than others in terms of providing you the benefits you paid for and deserve.
We don’t do business entity and/or tax-law, or give tax advice, but one possible advantage to paying the premiums oneself and after tax may be that the benefits may be tax-exempt as a result. Remember that when you are disabled, every penny counts. Check with your tax professional in determining how best to pay the premiums. Another advantage may be that you may be protected by state bad faith insurance law, which may give you more leverage in the event of a dispute.
The other way people typically obtain such coverage in as an employee benefit from or through the employer. Many employers provide it, so you should inquire into what employee benefits are provided in job interviews, as it is nice to have, especially if you have an important job and plan to work at that place any significant amount of time.
Employers really following the law are supposed to provide Summary Plan Descriptions (SPDs) of benefits, like LTD coverage, provided to their employees. If any employer isn’t forthcoming, ask. Many employees don’t keep them, even if they were handed out. One take away from this article should be to get them and to keep them - in a safe, easy-to-locate place
While getting the coverage through work is good, there can be challenges. One is the very real possibility that ERISA (which is federal law) may apply, even though all the employer did was buy into a group disability insurance policy. If ERISA law applies, you generally have to appeal any denial, or termination of benefits before you can sue and you are generally precluded from recovering emotional distress and punitive damages. If your employer pays the premiums and/or your payments or contributions are made with pre-tax dollars, your benefits may be taxable. Consult with your tax professional.
Because disability insurers don’t want to provide an incentive for filing disability claims, or for remaining off work, you should realize that benefits commonly start at about 60% of what the person had been earning when they became disabled, though they are usually indexed, so as to increase with certain indices. You should be aware of this in your “planning.”
If you have disability coverage and become disabled and the plan/insurance company denies your claim, or terminates your benefits, it is important to consult with a lawyer knowledgeable in both state insurance and bad faith law and ERISA disability law early on to determine your rights and the correct course of action.
[This is the first in series of articles on disability coverage. It is important to remember that in order to have a claim, you have to have the coverage in the first place. In subsequent articles, we will cover some of the things you may want to consider before making a claim and why you want to consult with a lawyer knowledgeable in this area early on, in the event of denial, termination, or other dispute.]
Mark E. Hancock is an attorney, with offices in Ventura, who handles insurance disputes, appeals and lawsuits, for people with short and long term disability coverage and other kinds of insurance, such as auto, CGL, condo, health, homeowners, inland marine, life, UM and UIM.