Note: This is our first article of a five-part series on Common Sense Plan Design for disability insurance. Make sure to subscribe to our blog in the top right corner of this screen so you receive subsequent articles as soon as they are published.
Part One – Disability Insurance Policy Structure
All insurance policies include design choices that make the coverage meaningful and affordable. Life insurance has a death benefit amount. Auto and Homeowners insurance include deductibles. With disability insurance or paycheck protection, you should start with the amount needed, how quickly the benefit is needed and how long the benefit is paid.
1. Monthly Benefit
Nearly all disability insurance plans provide benefits on a monthly basis. For moderate incomes, 60% of taxable income is a good place to begin. Start with your annual income, divide by 12 and multiply by 60%. Most paycheck protection plan premiums are paid by the insured, making the benefits at time of claim tax-free. Knowing this, and recognizing that most of us have our paychecks reduced by state, federal and FICA tax, the insurance companies develop their own issue limits based on an applicants earned income. The higher the income, and the greater tax bite, the lower the percentage of benefit available. Many companies offer disability benefit amounts from as low as $1000 to as high as $20,000 per month.
If you have little debt or project fixed household expenses at time of disability at less than 60% of your income, buy less than the maximum available. Try to cover your fixed monthly expenses. If you struggle each month to meet your expenses with your take-home pay, purchase as much as you can get or afford. Some paycheck protection is always better than no paycheck protection.
2. Waiting Period or Benefit Start Date
Begin by thinking of this as a deductible period in days. A short number of days before benefits begin might seem attractive at first but can add significantly to the overall cost of coverage. One major carrier offers a 30-day elimination period (deductible) at double the cost of a 90-day elimination period. Working toward an emergency fund that allows you to self-insure during the first 90 days of disability goes a long way toward an affordable plan design.
The disability insurance carriers develop their own rates and preferred plan design but for most, a plan with a 90-day waiting period is their “sweet spot.” Plans with a 60-day waiting period typically increase the premium by 40 to 50%, compared to a 90 day waiting period, while a 180-day waiting period only reduces the premium by 10-12%. Remember that with a 90-day waiting period, benefits begin after 90 days, but you will need to be disabled for a full month (30 days) past 90 days before a full monthly benefit is paid.
3. Benefit Duration
It would be nice to have disability insurance benefits paid every month to age 65, age 67 or perhaps even as long as you live. Unfortunately there is a stiff price associated with a policy providing a lifetime benefit duration so the best question is, what do you need?
The average duration of a disability varies significantly by age. The table below represents the industry’s most up-to-date information:
This chart represents the average duration of a disability lasting more than 90 days (and ending before age 65) based on the individual’s age when disability begins. Source: 2012 Individual Disability Experience Committee of the Society of Actuaries.
Most disability insurance carriers offer benefit duration periods of two years, five years, 10 years, Age 65, and Age 67. While a five-year benefit duration covers many disabilities, strongly consider coverage providing monthly benefits for 10 years or longer. Think about the options available if you remain disabled and your benefits run-out too soon.
Remember, some paycheck protection is always better than no paycheck protection. Disability Insurance Services is an industry leader in providing wise council and innovative disability plan design to brokers and clients. Let us know how we can help you.