Supplemental Disability Insurance
There are a few reasons one would need to purchase a policy:
- Your only coverage is Group LTD through your employer,
- Part of your income is bonus or commission income,
- You bought disability insurance awhile ago when you made a lower income.
Your Only Protection Is Group LTD Through Work
The vast majority of people that we talk to every day believe that they "Have It At Work". Unfortunately, almost without fail, once we explain to them exactly how much coverage they really do have, they can't sign up fast enough for supplemental disability insurance.
The most common group LTD plans being sold today say that they will cover 60% of base earnings, up to a monthly maximum of $5,000. If you are like most people, the only part of that definition that you read was "I have 60% coverage". Unfortunately, for many people that is not even close to being true. If you make more than $100,000 a year, the higher your income is, the lower the percentage replacement will be. Group LTD has a monthly maximum benefit, and many times that maximum is $5,000. If your income is more than $100,000 a year you aren't going to get any more than $5,000 a month. If you make $200,000 a year you don't have 60% income replacement, you have closer to 30%.
Unfortunately it gets worse. If your employer is paying for the coverage, any benefits received during a claim are taxable as ordinary income. If you were making $100,000 a year and thought you had 60% income replacement because you would get $5,000 a month, after taxes at 28%, you only have $43,200. The answer is very simple, you need to purchase a supplemental disability insurance policy to make up for the lost taxes, and try to get you as close to 60% income replacement as possible.
The other problem with Group LTD is the policy itself, if you compare an LTD plan to an individually owned policy from one of the top carriers, it is not even close. An individually owned DI policy is going to be a much more comprehensive level of protection. We offer an entire section of articles on the differences between group and individual disability insurance, please take the time to read some of those to understand more.
Bonus & Commission Income
If your income is made up of bonus or commissions, there is a very good chance this income is not covered under your Group LTD plan. Many plans cover base salary only, which leaves out bonus or commission income. If your gross income is $100,000 or more, but the vast majority of your income is bonus or commission income, you are in desperate need of a supplemental policy. The supplemental plan can also cover all of your bonus or commission income in the event of a disability.
You Bought A Policy Several Years Ago
It is not uncommon for people to tell us they purchased a policy 10+ years ago, when their income was significantly less than it is now. Individually owned policies are not written as percentages of income, they are written at a specific monthly benefit. That policy will never change unless you decide to update it. Since that monthly benefit was most likely the most you could qualify for when you originally bought it, if you are making more money now, the difference between what you are making now vs. then is not covered.
You need to keep track of how much disability insurance you have, and when your income goes up, it is time to purchase another policy. There are some optional riders you may have on the policy to help you keep it up to date like the future increase option, or the automatic benefit enhancement, but the final responsibility to make sure you have as much income covered as possible is on you.
One Major Reason Not To Rely On Group LTD
It is a huge mistake to think that you will always be insurable. You may not be able to obtain a supplemental disability insurance policy even now. This type of insurance is not something that is easy for everyone to get. You need to apply and the company will review detailed medical records making sure that you don't have a potential disability already. Even if you are perfectly healthy now, there is no guarantee that you will be a year from now. You could develop back problems, diabetes or some other condition that prevents you from getting a policy or complete coverage. Purchasing a supplemental disability insurance policy can guarantee you the ability to always have income protection no matter how much money you earn, what company you work for, or what medical condition you develop in the future.