Aug 03, 2018

The Importance of Disability Insurance

By Heather Kelly

Photo credit: Getty Images

In the insurance business there’s an old adage – “Do you insure the Golden Goose or the Golden Egg?” Unfortunately, most people opt to insure the egg which is a decision that, in a moment of genuine crisis, could lead to substantial distress and worry.

This is a scenario that I’ve seen played out with clients on numerous occasions. They insure their house, their car, their valuables – maybe even their jewelry and vacations – but they neglect to insure the Source of it All (aka the Golden Goose) – themselves! Their capacity to acquire and maintain all their treasured possessions depends on one thing – their ability to get up every morning and earn an income.

If I’m lucky, I will be working for the next 20 years or so. By far, my greatest asset is not my house or car or the balance in my investment account, it’s my ability to get up every day, go to work, and earn an income. If anything is worthy of being fully protected and insured, it’s that.

Workplace Disability Insurance

If you’re fortunate, you might have some form of disability insurance through your employer, and that’s great. However, depending on your personal circumstances and the amount of your salary or income, that disability insurance coverage could be woefully inadequate.

For example, let’s say you make a salary in the neighborhood of $150,000 per year. And let’s say that something unfortunate occurred where you can no longer work. If your employer-sponsored group disability insurance plan will pay $60,000 per year, which is very common, this would be considered taxable income.

If you’re in this income bracket, ask yourself this question – would $60,000 a year, before taxes, support the lifestyle you’ve grown accustomed to? Probably not. But even if it did, it’s very likely there’s not going to be much leftover to contribute to a viable retirement plan. Keep in mind, disability benefits are generally discontinued at age 65, so then you could be faced with this unenviable prospect – no source of income and a depleted retirement plan.

Nuanced Coverage

There are other aspects to the scope of coverage provided by disability insurance that you should be aware of. Generally, the coverage terms offered in a group employer-sponsored plan are not as favorable to the insured as an individual policy obtained in the private insurance marketplace could be.

For example, if you should become disabled at age 25, the annual amount of money you will receive will be worth significantly less by the time you’re 65. Unless it is explicitly specified in your policy, there is usually no cost-of-living adjustments in a typical employer-sponsored disability insurance plan.

Also, it is important to know that most employer-sponsored disability plans typically only consider your base salary when factoring your compensation, meaning bonuses, commissions, stock options, etc. are excluded which, for many high-income professionals, represent a significant portion of their compensation.

It is also essential to know the definition of “disabled” as spelled out in your coverage. Some policies have something called “Own Occupation Definition” which stipulates that you are considered “disabled” if you are unable to work in your chosen occupation. However, there are other policies that define “disability” as an inability to work in any occupation. Practically speaking, that means you might be unable to work as an executive in your field but if you can work as a door-greeter at Walmart, then you are not considered “disabled” and therefore, you are not entitled to disability payments.

Consult With a Professional

For these reasons and others, it is imperative to have an insurance or financial professional review the terms of your employer-sponsored coverage so that you will know exactly what is being covered – and what is not covered – in the event of your inability to continue to work.

Also, an insurance professional will be able to advise you on how you might effectively supplement your employer-sponsored plan with additional disability coverage, if you should you decide that it is prudent to augment your coverage.

As always, if you have any concerns about these kinds of crucial issues, it is a good idea to reach out to your financial adviser so they can be thoroughly examined and discussed.

United Capital Financial Advisers, LLC (“United Capital”) provides financial life management and makes recommendations based on the specific needs and circumstances of each client. For clients with managed accounts, United Capital has discretionary authority over investment decisions. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained herein is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances.

United Capital Financial Advisers, LLC (“United Capital”) is an affiliate of Goldman Sachs & Co. LLC and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization. United Capital does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances.

Goldman Sachs does not provide accounting, tax, or legal advice unless explicitly agreed in writing between you and Goldman Sachs. Nothing communicated to you, including within this document, should be considered tax advice. We have made no representations with respect to the tax consequences of the transactions contemplated herein. We understand that you have obtained, or will obtain, independent tax advice with respect to the transactions contemplated herein. Notwithstanding anything in this document to the contrary, and except as required to enable compliance with applicable securities law, you (and each of your employees, representatives, and other agents) may disclose to any and all persons the U.S. federal income and state tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of any kind.