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What is more valuable… a goose or its golden eggs? The obvious answer is the goose, for, without it, there would be no eggs. Now, unless you’re Willy Wonka, it’s unlikely that you’ll be faced with this decision in real life, but, there is a similar decision that most employed individuals should make. Think of your ability to earn income as your “goose” and think of your home, cars, jewelry, art collection or any other valuables as your golden “eggs.” While most of us will work with a licensed property and casualty agent to ensure that our valuables are adequately insured, less often we work with a professional to ensure that our income is protected.
The best way to protect your income is with disability insurance. If you become disabled and are no longer able to work, an insurance carrier will provide income for a period of time. Disability policies will generally provide for between 50-70% of income replacement. Here is what you need to know about disability insurance:
Do I need to get coverage? It depends. If you or your loved ones are relying on your active income to cover your lifestyle expenses (i.e., mortgage, food, water, etc.), then the answer is, yes, you need to obtain disability coverage.
How do I get it? First, look to your employer. Many employers provide group disability insurance to employees. A typical group arrangement will provide for 3-6 months of short-term disability coverage (generally after sick pay has been exhausted), followed by long-term benefits up to age 65 or recovery, if earlier. Group coverage is generally less expensive than getting an individual policy and can be easier to obtain without requiring medical underwriting. On the other hand, the benefit may only insure a portion of your salary (perhaps not your bonus) and you may not be able to take the coverage with you if you leave your employer.
What is individual coverage? Even if your employer has a group plan, you may need an individual plan to get the maximum amount of combined coverage. Although an individual policy is more expensive than group coverage and will typically require medical underwriting, it will go wherever you go and coverage can be customized to insure various sources of income like self-employment, salary and bonus.
What else? Know if your policies have an “own occupation” rider. This rider will provide you coverage if you can no longer work in your existing occupation, even if you are able to secure employment in a different field. Also, be aware that disability policies have a monthly benefit cap. Your group policy may afford up to 60% of income replacement, but be subject to a $5k per month cap. The cap amount may be far less than 60% of actual income. Lastly, when determining the amount of coverage you need, know that benefits received from an individual policy are generally not taxable, whereas group coverage paid for by an employer will be subject to tax.