Wealth management advisor answers questions on disability insurance

Updated March 9, 2020 - 12:14 pm

Q: What is disability insurance?

A: Disability insurance can provide income from an insurer to replace income that is lost through illness or injury of the policy holder, whether it be in the short term or long term. Income provided through disability insurance usually represents a percentage of normal earnings and can be privately purchased and owned or provided by an employer.

Q: Why would I need or own disability insurance?

A: The purpose of disability insurance is to ensure that a professional is able to replace income on which that person is dependent to cover everyday expenses. A person’s ability to earn income is often their most valuable asset. Most people work because they need to, not because they want to, and many have invested irreplaceable years in school and in building a career. Disability insurance helps the insured protect the cash flow that they have worked their entire career to create.

Q: If I have disability insurance from my employer, is that enough or do I need more?

A: If you are comfortable with the income that you would receive from your employer’s plan, net of any applicable tax, then you probably don’t need more. However, disability plans from an employer are taxable and may not cover essential parts of your income such as bonuses or commissions. In those cases, a supplemental policy would be appropriate. A typical employer disability plan covers 60 percent of the base salary before applicable taxes. Often, people feel that less than 60 percent of their base salary would not be enough to cover everyday expenses. In this case, a supplemental policy could make up some of the difference.

Q: Under what circumstances does a disability insurance policy pay me?

A: Once the insured has satisfied any waiting period (often 90 days), the disability benefits would begin if you meet the definition of disability under your contract. A physician must corroborate that the injury or illness has rendered the insured disabled.

Q: What is the “definition of disability?”

A: Some contracts will only pay if the insured cannot perform the functions of any job. This can be problematic if an injury would force an individual to make a significant career change. For example, if a person relies primarily on their mental capacity to perform a high-paying corporate job, a head injury might prevent them from being able to continue in that field. This person might still be able to perform a variety of jobs, such as working an assembly line or packing grocery bags. Of course, the difference in income might mean a significant lifestyle change for the insured. Policies that go a step further will provide “own occupation” coverage, which protects the insured if they can’t do the job that they already have. For physicians, one step further is a policy that would protect the income based on their specialty and not just the broad occupation of “physician.”

Q: What other areas of disability planning should I be aware of?

A: Talk to your financial professional about planning for disability coverage if you are a business owner. Plans for business owners can cover partners who may become disabled and can no longer work, or what happens if the business owner cannot be there to run the business, or even potential buyouts if necessary.

John Alcantara, is with Northwestern Mutual, The Alcantara Financial Group.

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