Paula Christine is joined today by Angela Mitchell of Bridged Benefit Solutions to discuss disability insurance - what it is, how you get it, and if you need it.
Angela starts with a stark reminder - the biggest asset we have is not our house or our car, it's our ability to earn a living. And we insure those other things - why don't we insure our ability to bring home a paycheck? Disability insurance will replace part of your wages if you are unable to work due to injury or illness, or sometimes even maternity leave.
Short term disability will generally cover 50-70% of your income for 13 or 26 weeks. Some policies are purchased from your employer, others are purchased by the individual. It's important to note that if the coverage is provided by your employer, your benefits can be taxed.
Long term disability will pay you out longer, potentially until you can collect social security. Again, this is based on your wages. It's important for folks who earn commissions to know this disability is based on your wage, not your commission.
If you can only afford one or the other, should you choose short term or long-term? Well, it depends. Angela explains the factors that should go into that decision.
Paula and Angela weigh the benefits of employee provided versus individually purchased plans. These can include premiums, pre-existing conditions, and more.
And finally, if you're employer does not offer disability, Angela talks about how to start that conversation.
More:
Find Angela Mitchell at Bridged Benefit Solutions at 248-250-2420 or by email at Angela@BridgedBens.com
For more info on the Making Money Matter course or working with Paula, visit https://www.paulachristine.com/
Or send Paula an email: paula@paulachristine.com.
Paula: So welcome to Beyond the paycheck. I'm Paula Christine. Living paycheck to paycheck and struggling to get ahead really sucks. But you can take control of your money and live a life that you dream about with knowledge and commitment. I'll provide you with the knowledge. It's up to you to make the commitment.
So today I've asked Angela Mitchell from Bridged Benefit Solutions to talk about the importance of having disability insurance. Angela welcome.
Angela: Thank you for having me.
Paula: So yesterday, when we were talking on the phone, you said something to me that you tell every client. And I want you to repeat that, because it's why you wanna have disability insurance.
Angela: Yeah. So when you ask people what their most valuable asset is, usually they'll say their car or their house. But really each of our ability to generate an income is the biggest asset we have. And if you lose that, even for a brief period of time, it could be life altering. So just as you purchase insurance on your home or your car or your belongings, you really should consider protecting your income.
Paula: So are we talking like that AFLAC duck on TV?
Angela: So a disability insurance policy replaces a portion of your income. If you become too sick to work, or if you sustain an injury that permits you from working, this benefit allows you to continue to pay your bills during the time you're not working. And Aflac is one of the disability insurers that has built a strong brand and name recognition, but there are several options available in the market.
Paula: So if I'm sitting down with my employer and he offers, or she offers disability insurance, short and long term, what is short term disability?
Angela: So most commonly we see an employer paid short term policy cover between 50% and 70% of income. For either 13 weeks or 26 weeks. So just as the name implies, it covers a portion of your income if you're disabled for a short period of time.
Paula: So is it disability, like if you get hurt at work? Or is it something like, if you get hurt outside of work or you're pregnant and on maternity leave?
Angela: Yeah. So it completely depends on the policy. Usually, if you get hurt at work, you know, on the job as a result of something that happened at work, your worker's comp policy would pay. Sometimes your short-term disability can pay also, or they may offset each other.
So it's completely dependent upon how the policy is written. But in general, an employer paid short-term disability policy is gonna cover things like you're out because you've had a baby. Maybe you throw your back out and you can't work for a few weeks. You're in a car accident. You had a heart attack and you need a few weeks to recover. So those type of things.
Paula: So is that usually paid by your employer?
Angela: The disability policy is normally. Yeah. So oftentimes employers will provide it. It can either be employer paid, or the employer pays all of the premium, or it can be a contributory plan where the employer pays some and you pay some, or there's voluntary plans where you pay all of the premium.
One thing that's important to note though, is whether or not your benefit is taxed, depends on who pays that premium. So say for instance, in an average, short term disability policy, there's usually a cap on what it'll pay out weekly. So let's say that cap is a thousand dollars. So if you're making $75,000 a year, that's about $1,400 a week.
But in the example, we're talking about, the policy has a thousand dollars maximum cap. So that's a thousand dollars before taxes if it's an employer sponsored plan. So depending on your tax bracket, what realistically will go into your bank account is probably about $750. So I think that's important to keep in mind so that you're not surprised when you get that first disability check, you may still need to rely on savings if you become disabled.
Paula: Yeah. My ex-husband had a hip surgery and he was out on disability and It was quite a big difference in his income to what he received. And luckily we had an emergency account to cover those expenses, but it was quite a big difference. It was really surprising when we found out cuz we never looked into it because we never needed it.
And then when we found out we were like shocked at what he was gonna receive based on what he normally receives in his income. So personally I'm self-employed so I have to ensure myself. I have long-term disability and a lot of employers do offer long-term disability. So how does that work?
Angela: So you can have long term, short-term, or both. I think if you have to choose just one, you'll wanna take a good look at your specific situation before deciding if you have enough savings to cover maybe three to six months. If you're unable to work, then you may wanna just consider long term. However, if long term disability is out of your budget.
And you're more worried about an immediate financial impact. If you get sick or are in an accident, then just short term is better than going without coverage, but in a perfect scenario, you would have short term and long term. So long term disability standardly starts to pay at either 13 or 16 weeks after you become sick or injured.
And can pay out up until you're eligible for social security. It really just depends how the policy is written, but if you have short term and long term disability, the policies dovetail into each other. So that means that once the short term ends, the long term would kick in. You wouldn't have double coverage and you wouldn't have a gap in coverage between the two. So long term kicks in right after short term ends.
Paula: But long term disability pays you out more than short term.
Correct. Cause that's based on your income? There's no cap?
Angela: There can be. So it's usually about 50% to 60% of your monthly earnings. And there usually is a cap of about $5,000 to $6,000. So the other thing I think is really important with long term is to understand the definition of earnings. So for example, if you're a salesperson and your base salary is $20,000, but you make an additional $60,000 in commission, You cannot assume that your earnings for disability are $80,000.
If the definition of disability in your policy is based off your annual salary, you're going to receive a portion of your income based off that $20,000. So really important to keep in mind as you're doing financial planning.
Paula: Well, that's huge. So if if that was my policy at my employer, then I would want to look at individual because you can buy it on your own.
You don't have to use your employer's plan, correct?
Angela: Yep. You can buy an individual policy. You can go direct to the carrier so you can go direct to an Aflac or Colonial Life. You can buy them from your independent insurance agent or you can buy them from a financial planner.
Paula: I think the individual policies have a little bit better coverage. And then also when you receive those funds, because you're making the premium, then they are tax free.
Angela: Correct. If you're paying the premium, then the policy is tax free. So that is a very nice benefit. Anytime you get an employer sponsored plan in general, you're gonna get lower rates because you're pooling that risk.
If I'm an insurance company looking at a group, I'm looking at maybe a hundred people, maybe one or two of those are gonna go out on disability. If I'm insuring just you, I'm more concerned because it's an all or nothing. So I'm more likely to pay higher premiums as an individual, but you're correct. Once a benefit is paid out, that will be tax free.
Paula: Yeah. I know my premium's quite high and it goes up every year.
Angela: Yes, I do always suggest, people circumstances change. So you wanna make sure if you do have an individual policy that you're looking at that periodically throughout your lifetime, as your situation changes, you wanna make sure you have enough coverage or maybe you can lower it.
If you get to a point where you can self fund, maybe the first year or so on your own, then you can pay less and have less disability and just kind of self-insure that first year.
Paula: Yeah, that makes sense. I didn't even think about that, but that really does make sense. I know I review mine every year because the renewal comes in and I have to okay the increase in my premium. So I have to look at it every year and they ask questions about my income. Not sure if they ask if I'm still insurable, but they know they do ask about what my income is, cuz it's all based on my income for the previous year.
Angela: Correct. And on an individual policy, there'll be a preexisting condition also.
So if you had a back surgery last year and you're buying this long term disability policy and you end up going out again because of your back, it may not pay. So that's important when you're buying an individual policy to look.
Paula: So is that not true if you're in a group policy?
Angela: It's usually not. I don't wanna say never because every policy is written differently, but for the most part, say I'm six months pregnant and I start with an employer while I'm already pregnant. The short term should pay out because a group policy, if I were to try and buy an individual policy at six months pregnant, they would exclude that pregnancy.
Paula: My daughter-in-law, she just had a baby in May and she changed employment while she was pregnant and her maternity leave was covered.
Angela: That's the nice thing about the group policy is they usually don't have those preexisting conditions.
Paula: But if I change my job, I lose that coverage. Correct?
Angela: You do. Sometimes you can, it's called portability. You can take it with you and turn it into like an individual policy, but your premiums will be much higher. If you have the option to buy employer paid disability. It's going to be your best financial option. But if you don't, having an individual policy is definitely a good second option.
Paula: So let's say my employer doesn't offer it, but I've listened to this podcast. And I think that they should, how would I approach them?
Angela: Yeah. So I would ask if they offer it. I think it's always good to bring to their attention. You know, that you're interested and why. Who knows they might have had other people ask?
So if they have enough people come to them and question it,, they may be willing to roll something out.
Paula: If it's voluntary, then it doesn't cost them anything. Correct?
Angela: Correct. Yeah. So I say for employers who don't have disability now, voluntary is always a nice starting option. Because it doesn't cost them anything, you know, allows them to let their employees buy some protection and it's payroll deducted.
So the employees don't have to worry about writing that check every month. The other option that employers have is what's called a buy up plan. And I think this is a great kind of starter plan for employers too. So what they can do is maybe say, okay, employees will pay for up to $500 a week if you have to go out on short-term disability and then the employees have the option to buy up to maybe a thousand dollars or $1,500.
So in that scenario, that first $500 is taxed. But if the employee chose to buy up, maybe they're a higher wager or need a little more, they pay those premiums, but then that portion is tax free when it pays out. So that's another nice kind of starter plan if employees just not sure they're ready to go all in on disability.
Paula: That's a great option. Kind of gives you the benefit of both worlds, you know, part paid by your employer and then the tax free part that you would receive for the part that you paid for.
Angela: Yeah. And I think it's nice. It can be expensive for an employer. Disability. And I know sometimes they're hesitant, but without fail a hundred percent of the time, if I have an employer who doesn't offer disability, the minute someone, you know, has a motorcycle accident or is having a baby, they call and say, how can we get a disability plan in here?
Because now they have to tell their employee that they have to go without their income.
Paula: Yeah. That would be a hard conversation to have. Well, I appreciate your time. I have a better understanding of disability and I thought I knew a lot, but I learned quite a bit today.
Angela: Thank you.
Paula: So if any employer wants to reach out to you and look about adding disability insurance to their employee benefits, how would they contact you?
Angela: Yeah, so my agency is Bridged Benefit Solutions out of Farmington Hills, Michigan. My phone number is 248-250-2420, or they can email me at Angela@bridgedbens.com.
Paula: Well, thank you, Angela. I really appreciate it. I really truly did learn a lot today. Thank you. So if anybody would like to get ahold of me, you can reach me at paula@paulachristine.com or check out my website paulachristine.com. Angela and my contact information will be in the show notes too. So next week we are going to be joined by Aaron, who is going to ask me questions like Brooke and, Patty did a couple weeks ago. That seems to be going very well for our listeners, that they are reaching out and asking personal questions and agreeing to be on the show. So we will talk to you guys next week.