Column 97 - Disability: What's the Risk? What do I have?

Column 97 Disability: What's the Risk? What do I have?

 

Last week I introduced the concept of Disability Insurance and provided a primer on what to look for in basic coverage.

The following graphic from the Council of Disabilty Awareness is rather telling about the risk of Disability.  Most folks assume it will "happen to someone else". 

 

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Most large employers (over 100 employees) provide some form of group Long Term Disability Insurance.  The product is very affordable when the pool is larger and it is a benefit that is greatly appreciated by the employees.  Given the choice, most employees would reduce their pay by 1% in order to guarantee that a portion of their income will continue should they be disabled.

Smaller employers may also provide group disability insurance to their employees. The rates become most affordable if the group has 10 or more enrolled employees. 

Most California statutory employees have short term disability benefits under SDI (State Disability Insurance). Weekly benefits range from $50 to $1104 depending on prior income.  To qualify for the maximum benefit, the individual must earn at least $26, 070.92 in a calendar quarter in the base period.

A base period covers 12 months and is divided into four consecutive quarters. The base period includes wages subject to SDI tax which were paid approximately 5-18 months before an individual's disability claim.

Workers covered by SDI are covered by two benefits: DI and PFL (Disability Income and Paid Family Leave). DI provides short-term benefits to eligible workers who suffer a loss of wages when they are "unable to work due to non-work-related illness, injury, or pregnancy". PFL provides benefits to eligible workers who suffer a loss of wages when they need to take time off work to care for a seriously ill child, parent, parent-in-law, grandparent, grandchild, sibling, spouse, or registered domestic partner, or to bond with a new child.

The DI benefit is approximately 55% of earnings, up to the maximum and can be paid for up to 52 weeks.  The PFL is paid for up to six (6) weeks during a 12-month period.

Self-employed persons must elect to participate in this program.  This can be quite valuable for someone who is not insurable due to health history or short earning history.

It is important to note that that individuals earning greater than $100,000 per year are likely under-insured if they do not have additional coverage.  In my experience many people, especially professionals are not adequately insured for disability.  It's always gut wrenching when we get a call that a client has suffered a serious illness or accident and we look in the file, only to find out they have little or no disability insurance.

On the other hand, it is very satisfying to know that a check is being delivered regularly to our client during their time of need.  One of my dearest friends, a physician, was disabled in his early 50's.  As a physician who had worked many years, certainly he had some financial resources.  But a divorce and the situation that led to his disability had reduced his earnings dramatically prior to disability.

Even when he returned to work, it took time to rebuild the income.  Self-employed physicians and professionals have to deal with the reality of receivables.  Insurance companies are billed, claims processed and if all goes well the doc receives payment in 30-90 days from the time they delivered the service. 

(As an aside, I am always amazed at how many people do not feel they have to pay their copays to the physician!)

In this case our disability insurance had a "residual" benefit. This benefit is tied to actual cash flow, not the physical extent of the disability.  So, because he suffered a loss of income due to the disabling condition, the policy continued to pay, even though he was fully returned to work.  

The provision stated that if the income loss was at least 20%, then the policy would pay a percentage of the benefit.  Simply, if the income loss was 25%, the policy would pay 25% of the monthly benefit.

The provisions are important to the self-employed.  They care more about the loss of income than the physical extent of the disability. Certainly our creditors want to be paid!

 

 

A comprehensive list of websites and resources for this topic can be found at:

http://disabilitycanhappen.org/resources/ or http://www.edd.ca.gov/disability/