If you are a high earner and plan to continue working at least a few more years, what is your most valuable asset? Almost certainly, it’s your future earning potential.
If you lost your ability to do your current job, would you be able to pay your expenses? Support your loved ones? Maintain the standard of living you’ve come to expect? Pass on an inheritance to your children?
Purchasing good long-term disability (LTD) insurance coverage is one of the smartest decisions high wage-earning individuals can make. For a relatively small monthly premium, you can guarantee a substantial portion of your income will continue to be there for you if you become disabled—potentially even if you are able to find alternative work.
Choosing the Right Policy Is Crucial
Unfortunately, not all disability insurance policies are created equal. And picking the right policy requires more than just choosing a percentage of income you want to protect.
Different policies have different definitions of disability, different term lengths, different exclusions. A variety of additional riders may be offered.
If you’re self-employed or earning a high income, it makes a ton of sense to think critically about your options and pick (or customize) a policy that makes the most sense for your occupation, income, and lifestyle. Far too many policyholders never really look at the fine print—and then are shocked to discover that their coverage isn’t as solid as they first thought.
Unfortunately, insurance companies don’t always make it easy to find the right policy. In this post, we’ll take a closer look at some of the things you should be thinking about.
The Benefit Amount
This is how much the policy will pay you per month if you become disabled. In most plans, it’s calculated as a percentage of your pre-disability earnings, up to a certain maximum monthly amount.
You’ll want to make sure your monthly benefit will be enough to fund your desired lifestyle. Most policies will pay between 50 to 80 percent of pre-disability earnings, and the monthly cap might be as low as a few thousand dollars or as high as $25,000 per month or more. Crunch the numbers and make sure that your monthly benefit will be sufficient.
You should also look into how pre-disability income is calculated. Does it consider only your base salary? Total taxable income? What about self-employment income or investments? Check the policy language to be sure.
If your income tends to fluctuate significantly from year to year, you should also consider how your disability policy calculates average monthly pre-disability earnings. For example, your policy may look at your last 12 months of earnings, or the past 24 months. A longer look-back period can help you if you become disabled at a time when your income is in decline, but hurt you if you become disabled at a time when your income is increasing. Carefully consider the potential risks and benefits when making a decision.
Also, even though almost all LTD policies include offset provisions for a long list of other income disability-related income, many individually purchased disability policies do not contain those same offset provisions. You will want to review any type of offset provision closely to make sure that you understand the potential impact of any reduction of your benefit.
The Benefit Period
The benefit period is the maximum length of time that you can receive benefits after becoming disabled, regardless of whether you’re able to return to work.
Some disability policies have benefit periods that last as little as two years. Other policies include coverage that lasts longer. The most robust plans will generally pay benefits until you reach Social Security normal retirement age (SSNRA) or age 65—even if that’s still decades away.
Most high earners naturally tend to gravitate toward the longest possible benefit period. However, these plans will naturally be the most expensive. If you already have a lot of money saved and are planning to retire relatively young—well before SSNRA—a shorter term might make sense. Work with your financial advisor to determine what would be best for your financial situation and retirement plan.
RELATED POST: How Long Can You Be on Long-Term Disability? – Bryant Legal Group (bryantlg.com)
The Elimination Period
Also known as the waiting period, the elimination period is the length of time you must be continuously disabled before your monthly disability benefits kick in. Depending on the policy, this could be as short as 30 days or as long a year.
When you get group benefits through an employer, the elimination period is usually the same as the benefit period of your short-term disability policy. So, long-term disability kicks in as soon as short-term disability stops (provided you supply the required documentation and continue to meet the definition of disability under the policy).
But if you’re buying disability insurance on your own, you’ll need to think carefully about how quickly you’ll need your disability benefits to begin, based on your finances and any other insurance plans (such as short-term disability) you have in force. Choosing a disability policy with a shorter elimination period provides quicker access to benefits, but comes at a higher cost in terms of premiums.
The Definition of Disability
What qualifies a person as “disabled?” While the Social Security Administration has its own definition, most LTD policies fall into one of two broad categories:
- Any occupation: You are considered disabled if you are unable to maintain any substantial gainful employment. If you can no longer continue your high-paying career, but can do a simpler or lower-paying job, you will not be considered disabled under an any occupation plan.
- Own occupation: You are considered disabled if you are unable to do the material and substantial duties of your current occupation (at the time you became disabled), even if you can continue working in a different occupation.
If you earn a high wage or work in a specialized field, own occupation coverage is critically important. Instead of being forced to go back to work in a lower paying occupation, the choice is yours. If you wish, you may be able to engage in other work that you’re capable of performing and still draw your disability benefits.
However, there are a few additional things to look out for:
- Does the definition change over time? It’s very common for group LTD policies to start out with an “own occupation” definition, then transition to “any occupation” after a set period (often 2 years). This can lead to loss of coverage once two years are up—even if you are still unable to work in your original profession.
- Do you need specialty-specific coverage? Even basic “own occupation” coverage may not be strong enough, particularly for professionals with a niche, lucrative specialty. For example, if you’re a highly trained surgeon, you want your coverage to define your occupation as narrowly as possible, so you still qualify for disability benefits even if you’re still able to work as a doctor outside your original subspeciality. This type of coverage is generally available in the disability insurance market.
RELATED POST: Do You Need Specialty-Specific Disability Insurance? – Bryant Legal Group (bryantlg.com)
Residual Benefits
Not every person with a disability that affects their occupational status is totally disabled. For example, you may have a condition that prevents you from working full time. Or you may lose the ability to perform some of your previous job functions, but can still handle a reduced role (at a lower income level). This is a common scenario for people with degenerative conditions that gradually worsen over time, but can happen with other types of injuries and illnesses too.
If your disability policy includes a rider for residual or partial benefits, you may qualify for a percentage of your “full” disability benefits, based on how much your earnings drop as a result of your disability.
Policyholders who do not have a residual benefits rider or partial disability provision in their policies, on the other hand, may find themselves stuck in a “coverage gap” where they don’t qualify as disabled (even under an own occupation plan), but are unable to earn enough income to cover their expenses. Furthermore, when policyholders eventually qualify and file for full disability, their monthly benefits may be calculated based on their lower earning level.
RELATED POST: Residual Disability Benefits in Private Disability Policies: What to Know – Bryant Legal Group (bryantlg.com)
Other Notable Terms and Conditions
Each disability policy will come with a list of additional terms, conditions, and exclusions you should be aware of before you purchase anything. Common examples include:
- Pre-existing conditions. Coverage for disabilities arising from medical conditions you already knew about, or received care for within a specified “lookback period” before your disability plan’s effective date, may be limited. Depending on the insurance company’s underwriting policies, you may be offered a disability policy that excludes your pre-existing conditions entirely for a certain period of time.
- Mental health limitations. It’s very common for disability policies to limit coverage for mental health conditions, such as depression and anxiety. Coverage is often limited to two years, even if your plan ordinarily contains a much longer benefit period.
- Limitations and exclusions for other conditions. In addition to mental health, your disability policy may limit the benefit period (or completely exclude) other types of conditions. Common examples include self-inflicted injuries, disabilities caused by illegal or high-risk activities, or disabilities with “self-reported” symptoms such as chronic fatigue syndrome or fibromyalgia.
- Return-to-work provisions. Some policies include incentives or requirements for policyholders to get back to work, such as participation in rehabilitation programs.
We encourage you to read your plan documents carefully before purchasing a plan, and reach out to a long-term disability attorney if you have questions.
Will Your Coverage Grow With You?
As you grow in your career (and potentially grow your family), your financial needs will change as well. Coverage that seemed sufficient in your 20s and 30s may no longer be enough when you reach your peak earning years and have new personal and professional responsibilities.
You could buy a new policy every few years. But that adds significant inconvenience and risk. You’d have to resubmit medical information, potentially introducing new pre-existing conditions. The new plan might have certain conditions and limitations you don’t want, as well.
A better option might be to purchase a plan at the outset with a rider that allows you to increase coverage at regular intervals. Common examples include:
- Automatic increase benefit (AIB), which automatically increases coverage (and premiums) over time according to projected salary increases.
- Future increase option (FIO), an alternative to AIB that allows policyholders to voluntarily increase coverage at set intervals.
A related problem that’s been top of mind for the last few years? Inflation. What happens if you become disabled early in your career, and need to live on your monthly disability benefit for years or even decades until retirement age?
A cost-of-living adjustment (COLA) rider is designed for this purpose. If your policy includes one, your benefit amount will rise over time according to fixed or indexed rate—making it much easier to sustain your expected standard of living despite a lengthy period of disability.
Non-Cancellable Rider
If your insurance policy is non-cancellable, as long as you continue to make premium payments on time, the insurance company cannot change your policy in any way (premiums, benefits, coverage) or—crucially—deny a policy renewal.
Remember, disability insurance companies are businesses. If they are paying you benefits, or if they believe your existing coverage is too risky, they’ll look for any way they can to cancel your plan, jack up your premiums, or stop you from renewing.
With a non-cancellable policy, you can lock in great coverage and lower premiums while you’re still young and healthy, which will persist even if your health status changes.
For example, say you develop a degenerative condition in your early 40s. You can still work, for now, but will likely become disabled within 5-10 years. If your policy wasn’t governed by a non-cancellable rider, the insurance company might try to increase your premiums or change your policy provisions to weaken the strength of your coverage. But if the policy is non-cancellable, the insurance company must abide by the original terms of your agreement, as long as you hold up your end of the bargain by paying your premiums on time.
Additional Tips
Here are a few additional things to think about as you consider purchasing long-term disability insurance:
- Get coverage early. There’s been an alarming trend in recent years of young professionals forgoing disability coverage. While young professionals might think disability “can’t happen to them,” the reality is that young adults are still at risk for developing disabling conditions and injuries. They also have the most to lose, with a full career of earnings ahead of them. Purchasing a robust plan early in your career provides security, peace of mind, and can also lock in lower rates for the same level of coverage.
- Don’t cheap out. It’s true that comprehensive disability policies that offer strong own-occupation coverage, high benefit amounts, and non-cancellable protection (among other things) are more expensive than a typical group LTD policy you’d get from your employer. But for highly paid professionals, they’re worth it—and often an individually purchased policy is a great way to supplement LTD coverage. When your benefit amount doesn’t meet your financial needs, or—worse—won’t cover you at all unless you are totally disabled, you (and often, those who depend on you) take the risk and pay the price.
- Shop around. Terms, conditions, premiums, and policy language can vary significantly from company to company. Only a few insurance companies offer true “specialty specific” coverage, for example. Getting quotes from a few different reputable insurance companies can help you find the best coverage.
- Talk with your financial advisor or long-term disability attorney. Choosing disability (or income protection) coverage is a big decision, and a difficult one. These professionals can give you impartial advice and help you identify the pros, cons, risks, and benefits of each choice.
Questions About Your LTD Policy? Need Help With a Claim or Appeal? Contact Bryant Legal Group Today
Our Chicago long-term disability attorneys have extensive experience working with doctors, lawyers, business owners, and other highly paid professionals with specialized skills and unique roles. To request a consultation with our legal team, call (312) 561-3010 or complete our simple online contact form today.
