|Special to Sections of the ABA from the American Bar Endowment (www.abendowment.org) as printed May 16, 2011
Each year in March Lifehappens.org sponsors Disability Insurance Awareness Month (DIAM), but the lessons from DIAM apply year-round, and may be important for ABA members to learn more about.
Just ask any financial advisor what risk could be called “the forgotten risk,” and, chances are, the answer will be disability. Their clients often ask whether they have too little, too much, or the right kind of life insurance, but rarely have they thought about how they could survive financially if their income stopped due to a disability. In reality, disability insurance is as important as (and in some cases, even more important than) life insurance.
Facing the Numbers
At any given age, the odds of becoming disabled are much higher than the odds of dying. Every year, 12 percent of the adult US population suffers a long-term disability. One out of every seven workers will suffer a five-year or longer period of disability before age 65. If you’re 35 now, your chances of experiencing a three-month or longer disability before you reach age 65 are 50 percent, according to the National Association of Insurance Commissioners (NAIC). If you’re 45, the figure is 44 percent.
These odds would not be a problem if people had substantial savings that could be drawn on in the event of a disability. But that’s rarely the case, and any money that has been set aside has likely been earmarked for goals such as college or retirement. In a 2007 NAIC survey, 56 percent of adults said they would be unable to meet their expenses if they couldn’t work for a year due to a disability.
Disability Is Called “A Living Death” for Good Reason
First, suffering a disability would be a catastrophic event for you, your family, your friends, and your coworkers. It could create enormous emotional pressures for the family because your role would change, and you would have physical needs to be met. There could be enormous financial pressures that would exacerbate those emotional pressures. You could witness firsthand the impact that your disability planning—good or bad—would have on you and your family.
Harder to Get
To complicate matters, fewer employers offer disability insurance than life insurance, and it may be harder to qualify for individual disability coverage than for individual life insurance. If you are a solo or small law firm practitioner, there may be even fewer options. The bottom line is that if you’re working you should protect your income, and one way to do that is with disability insurance.
When you apply for disability insurance, usually you can get a maximum of 60 percent of your monthly earned income before taxes. (Unearned or investment income does not qualify, because it presumably continues even if you are disabled.
Social Security Disability Coverage
If you have been working for at least 40 quarters, you may be able to obtain a small disability benefit from Social Security. However, there is a lengthy waiting period, you have to be so disabled that you cannot do any job (not just those for which your education and training suits you), and it’s very difficult to obtain benefits. More than 80 percent of the applicants fail the first time around. Some hire lawyers to help in the appeals process, which can take more than a year.
You can get an estimate of your Social Security disability benefits online. Just as with retirement benefits, your disability income is dependent upon your “covered earnings,” or the amount on which you are taxed for Social Security. Because they’re so hard to come by, don’t count on Social Security disability benefits when you evaluate your disability income needs.
Features and Benefits of Coverage
Insurance can becomplicated because of the variety of policies available, and disability is no exception. There are all kinds of disability policy features and benefits. However, the basics are simple. The first feature to consider is the amount of monthly benefit. Many disability policies have a fixed monthly benefit that does not increase with time. If you remain healthy, you may be able to apply for additional coverage if your income goes up in the future, or some policies offer an automatic benefit increase rider that you can purchase with your policy for an extra premium.
The second, and perhaps the most important, feature of your plan is the definition of disability— whether it is “own occupation” (the inability to perform the duties of your specific occupation) or “any occupation” (the inability to perform the duties of any job for which your education and training make you qualified). One reason ABA members turn to American Bar Endowment (ABE) sponsored insurance is that ABE has negotiated an “own occupation” definition of disability that includes your specialty of law. With this feature, you can receive benefits for up to five years when you are totally disabled and unable to perform your regular job including specialty of law—not just “any job.” It’s an important feature if you become disabled. You can find more information on ABE-sponsored Disability Insurance plans. The third important feature of your plan is the waiting period, or the amount of time you must be disabled before benefits begin. These waiting periods can range from one week to two years. Waiting period length does affect the cost of coverage. The longer the waiting period, the lower the cost of the coverage.
Another feature to consider when choosing a disability plan is the benefit period, or how long you will receive monthly benefits once your disability plan begins to pay. The benefit period can range from six months for a short-term disability plan to age 65 for a longer term disability plan. Of course, the longer the benefit period, the more the disability plan will cost.
In addition to these features, there may be other coverage options, as well as a variety of riders. An important rider can be one that pays a partial benefit if you can return to work only part time. As noted above, another rider may offer you automatic benefit increases once you become disabled so that your benefits keep up with inflation.
In addition, there may be a rider for an additional-purchase option, which guarantees you the right to buy additional disability insurance in the future if your income increases, regardless of your health at that time.
Start With Your Employer
If you are evaluating your disability insurance needs, the first place to check is with your employer. Group insurance coverage offered by the law firm may be less expensive than an individual policy and may not require health underwriting. Your firm may also pay part or all of your disability premium. Ironically, it is not necessarily beneficial for your employer to pay for your coverage. Normally benefits are taxable if paid by an employer and nontaxable if you pay the premium personally. (Talk with your tax advisor about your particular situation.) Since you cannot insure 100 percent of your income, whether you pay income taxes on your disability benefits can make a huge difference in your family’s standard of living.
When you review your law firm’s coverage, keep these points in mind: if it doesn’t cover at least 60 percent of your income, doesn’t pay benefits to age 65, and has a waiting period longer than your savings can last, you may need to look into individual insurance as well.
public service in the field of law. Last year’s grants totaled more than $7 million! You can find out more information about ABE-sponsored insurance programs.
Buying on Your Own
Individual policies can vary enormously. The monthly benefit amount for which you can qualify, the price, and the benefit period depend upon your occupation, income, health, and other factors, because most individual disability insurance policies have a health underwriting requirement.
Here are some rules of thumb to consider as you look to buy disability insurance:
- Buy the highest monthly benefit for which you can qualify and you can afford.
- Consider an “own occupation” feature. Many insurers now only offer the “any occupation” coverage, which could force you to work at any job, even if it isn’t in the legal field.
- Choose the longest waiting period that your savings will allow. A policy with a six-month waiting period is much less expensive than one with a 30-day waiting period.
- Buy coverage for the longest benefit period possible. A plan that pays to age 65 may be a good option if your plan is to work until then.
- Look for discounts available. Set for Life Insurance has discounts available for ABA members around the country.
For more information about disability insurance for attorneys and to request a quote, please contact the Set for Life Insurance office today. Mention you are a member of the ABA in the quote request form.