Disability Insurance: Pandemic Spotlights Need for Income Replacement

Disability Insurance: Pandemic Spotlights Need for Income Replacement

The coronavirus pandemic has taught many lessons, often only obliquely relevant to the viral crisis itself, but welcome to the alert.

Our case in point: disability insurance, or DI.

Many clients have some form of DI, commonly as part of their workplace benefits. However, tens of millions have lost their jobs over the last few months, and with them the income security of DI. The chance of a disabling illness or accident takes no holidays and a coverage shortfall is beyond worrisome for many clients. Individual DI policies can be purchased, but all require the customer to be employed for at least one month before they can even apply.

The risks and chances of life were brought home to me last year. Over a long stay in Phnom Penh, Cambodia, I spent my days at a coworking space in the city’s southeast. It was walking distance to my apartment, good for cardio, unfortunate because it required crossing a worrisome-looking canal that snaked through the city – whatever was in it certainly didn’t look like water.

The coworking space was filled with diligent, quiet professionals. It offered free refreshments (coffee, tea, dried fish skins, Budweiser beer) and a helpful staff. Leaving at dusk during rush hour, I launched the usual maneuvers to cross the jammed, chaotic street, but this night, I was a bit careless and missed the scooter-riding teenager speeding down the center strip.

The impact was sufficient to launch me two feet in the air and land me square on the asphalt – the latter word hints at which part of the anatomy first contacted the unforgiving earth. I bounced and landed sideways on my arm, distinctly feeling the shoulder bone pull away from the rotator cuff. I was out for a few seconds, but recovered as bystanders pulled me up, saying only, “I think I broke my laptop.” She was fine, and so was I.

Figuring how a 60-year-old desk jockey survives 500 pounds of hurtling metal, twirls a la Fred Astaire and escapes serious injury might best be addressed in a house of worship. In the moment, all I could think was: can I still work? I did recall another time in Singapore, when a doctor told me he suspected a brain tumor – an MRI revealed no bullet to dodge. In both cases, I was OK. But what if?

Many employers offer group disability coverage that pays about 60% of monthly compensation. Supplemental coverage can sometimes be purchased to cover lost perks like bonuses, or simply to increase the percentage of salary compensation. If available, this is an economical way to increase basic group DI coverage, as the premiums average around one percent of the insured annual benefit.

Individual disability insurance policies are much more expensive, commonly 2-4 percent of the annual benefit. Despite the cost, if affordable to clients, they make solid sense, as clarified by the pandemic’s harsh teaching: if you lose your job, you lose DI coverage and it’s too late to qualify for an individual policy, as only the employed need apply.

Despite the cost, individual DI coverage is appealing because it is so versatile. Group plan payouts are determined by earnings as defined by the W-2: recipients receive a percentage of their earned income. Individual coverage is available that pays a monthly lump sum, limited solely by the premium one can afford. Individual policies can also be customized in innumerable ways, and are often purchased as a cost-effective, personalized supplement to employer coverage.

We encourage advisors to discuss individual DI insurance with their employed clients. First, determine the client’s sense of employment stability. If they’re concerned about the days ahead, encourage them to act quickly. Insurers now try to expedite the application process, but even in the best case, underwriting still takes about two months. If an applicant were to lose their job while papers were shuffling, they would be immediately disqualified from coverage.

Clients occasionally deflect this discussion by mentioning Social Security Disability Insurance. Most citizens, even the wealthiest, can qualify for SSDI. There are caveats, though: first, you need to pay into Social Security for ten years to receive benefits. There are only a few exceptions, which mainly apply to disabled adult children of retired or deceased parents.

Crucially, SSDI benefits as a rule are deducted from company policies on a dollar-for-dollar basis, so they should not be seen as a supplement to insurance coverage. The same goes for many personal DI policies, as well, so take care how you structure them.

A particularly tricky aspect of any DI is the policy issuer’s definition of ‘disability’. The difference between ‘own occupation’ and ‘any occupation’ must be learned: in the former case, disability might be easy to define, but in the latter, the situation can become cloudy – you may not be up to C-suite pressures, but could you greet at Walmart? This issue can lead to distressing delays in receiving benefits.

Customers usually can’t do much about the rules of group policies. This highlights why individual DI policies are so useful, as they can be structured advantageously to match the insured party’s circumstances and needs. Professional advice is invaluable here, as the offerings are complex and the fine print often vexingly opaque.

An older gentleman we know, a manager at a heavy industrial facility in Massachusetts in the 1940s, told us about a hydraulic press operator who was notoriously careless. One day, he allowed his forearm to sneak beneath the ten-ton press. Sensing dismay, our storyteller attempted to calm us: “It worked out fine. He was back in six months – the union bought him a prosthetic arm, so he could work. How his family got by all those months, though, I don’t know.”

A different time most certainly, but misfortune, chance and virus are still with us. Fortunately, we have honed tools to protect our livelihoods, and we continuously encourage clients not to let them stand idle.

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