Disability Insurance: Even for Your Desk Job

Picture of James Hill

James Hill

Associate Wealth Manager

My dad always preached the importance of insurance, just like your dad probably preached it to you, and his dad preached it to him. While we were young and invincible (or was that just me?) our dads’ preaching didn’t seem urgent or necessary. Unfortunately, the things insurance protects against happen unexpectedly, so putting off getting the right coverage can cost us dearly if we’re uninsured or underinsured.

Insurance protects our families’ finances from many debilitating potential losses like home damages, car accidents, lawsuits, and even death. One type of insurance we frequently neglect is disability insurance; only 51% of American workers had disability insurance as of 2023, according to Guardian Life. The thought of becoming disabled seems far-fetched but the reality is that 25% of current 20-year-olds will become disabled – to some degree before they turn 67, according to the Social Security Administration. Disability insurance is essential to ensure that you can provide for your family and protect what you’ve worked so hard for. So how does it work?

Basics of Disability Insurance

Disability insurance pays you a lump sum or recurring benefit if you become disabled, injured, or sick and can’t work. These policies cover everything from broken bones to loss of limbs or eyesight, even neurological & mental conditions that make it difficult or impossible to work. Disability policies won’t cover injuries from acts of war, participation in a riot, intentional self-harm, injuries suffered while committing a felony, or loss of work related to pre-existing conditions.

Short-term disability policies typically pay benefits for the first 90-180 days out of work but can cover as much as 2 years. Long-term disability policies pay benefits for a stated length of time or up until a certain age (usually 65-67). Usually, benefits begin after an “elimination period,” which is an amount of time at the beginning of a disability that the policy won’t cover. In group plans, the elimination period is fixed, but with a private policy, you can extend the elimination period in exchange for a lower premium.

Typically, private plans pay a fixed monthly amount while employer-based (group) plans pay a percentage of your salary. Most group plans are cheaper than private plans, but can come with a couple of major downsides, benefit caps and taxation of benefits:

·        Disability benefits from a group plan are capped at a monthly benefit. If the policy’s stated percentage of your income is above the cap, you’ll receive a reduced benefit, leaving you underinsured. For example, if the policy pays 60% of your salary up to a $10k/mo ($120k/yr) cap, and you make $300k/yr, your benefit maxes out at $120k per year (40% of your salary) instead of $180k (60% of your salary).

·        Disability insurance benefits are taxed based on who paid the premiums. If your employer paid the premiums (a common practice) or you paid the premiums with pre-tax paycheck deductions, your benefit will be taxable. If possible, you should pay your premiums via after-tax paycheck deductions so that your benefit will be tax-free. Private disability policies will also pay out tax-free benefits since premiums are paid out of pocket with after-tax dollars.

o   This also works in proportion, so if your employer pays 60% of the total premium for your disability insurance, 60% of your benefits would be taxable. You can usually see who’s paying your premium by reviewing your pay stub.

How your policy defines a disability can change whether you receive benefits. An “Any Occupation” definition has the cheapest premiums but only pays benefits if you can’t work in any capacity. An “Own Occupation” definition has the most expensive premiums but pays benefits if you can’t work your specific job (e.g, a surgeon who suffers a debilitating hand injury). A “Modified Own Occupation” definition has a premium cost in between own & any occupation and pays benefits if you’re unable to work in your job or one for which you’re qualified by experience, training, or education (e.g, a surgeon with a hand injury may not receive benefits because they could still practice medicine even though they can’t perform surgery).

The characteristics of your disability policies can be found within the plan documents provided during open enrollment for a group policy or when your private policy is put in force. If you have questions about how your disability policy is set up, contact your Boardwalk advisor to review the plan documents.

Why Disability Insurance is Important, Even for Your Desk Job

One frequently asked question is “I work a desk job, why do I need disability insurance?” Unfortunately, not having a physically demanding job doesn’t eliminate the risk of losing your income due to disability. Even if you’re young & healthy and work a desk job, freak accidents, a slip and fall resulting in a concussion, or an unexpected sickness can derail your ability to work an otherwise unhazardous job. If these issues lead to memory problems, brain fog, an inability to focus, or diminished capacity to meet with clients, colleagues, or vendors, you may not be able to retain your job, straining your financial situation.

Often, high earners have set up their lives in response to their income; nice cars and houses, private schools for their kids, etc. These are wonderful things but lead to a high “burn rate” if the income stops. In the case of a disability, it can take a long time, if ever, to return to the high income that supports this spending. Once emergency savings run out, difficult decisions need to be made, such as selling your home, trading in cars for less expensive models, pulling the kids out of their schools, making major lifestyle changes, or pulling money from accounts designated for retirement, which can result in excess taxes and penalties. Disability insurance ensures that income continues, alleviating some of these hard decisions.

How Boardwalk can Help Make Sure You’re Properly Insured

Your Boardwalk advisor knows that disability insurance is vital to helping you attain your financial goals and provide for your loved ones. We take your entire financial situation into account to help determine if you’re properly covered and if not, how much additional coverage you need. We ensure you’re maximizing your group coverage, then we partner with outside insurance brokers (no financial relationship) who shop for a variety of insurers to get you the best coverage for your situation and help you set up your insurance. Once you have sufficient coverage, we review it regularly in case changes to your savings, income, or goals require changes to your insurance.

A disability event is very difficult to endure, but disability insurance makes sure that you can focus on your health instead of worrying about your financial situation and your family’s future.

Three Tips for Your Home, Auto, and Umbrella Insurance

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John Morton

Senior Wealth Manager

When was the last time you reviewed your auto, home, and umbrella insurance policies? If you haven’t done so recently, it might be prudent to revisit your coverages. For example: when it comes to homeowner’s insurance, you’ll want to make sure that your replacement cost is updated to reflect today’s higher housing prices and construction costs (and all those pandemic updates you made on your home)! Let’s dive a bit more into what replacement coverage means for you and two other quick tips.

Replacement cost coverage:

If your home needs to be partially or fully repaired or rebuilt due to a covered event, the insurance company will pay up to the replacement cost within the policy. It doesn’t matter if the shingles are 10 years old or the porch is brand new, insurance companies will replace your home or home components without considering depreciation. So, it matters what your home would currently cost to rebuild – recently we’ve seen many policies have inadequate coverage because housing costs have risen. We recommend you revisit this with your insurance broker or agent.

When you do, we recommend that you pay attention to how the policy defines replacement. Standard replacement cost replaces your home with fixtures, materials, and function as close as possible to what it’s like now. Functional replacement cost will build you a new home, but it may not be the same value – you’ll save on premiums, but the insurer will only replace your damaged property with something that functions the same way. Guaranteed replacement cost is a step up from the standard: just in case your home actually ends up costing more to rebuild than the policy states, your insurance company will foot the bill. There’s more to these differences, of course, so we suggest you discuss the coverage details with your agent.

Personal property coverage:

Everything from the clothes in your closet to the artwork on the wall and the new couch you just bought falls under the category of personal property within your homeowner’s insurance policy. You’ll want to make sure you have a conservative coverage amount relative to what you think everything is worth (prices aren’t exactly the same as they were even a few years ago). Your insurance company usually caps how much they’ll pay for certain items, like jewelry or valuable artwork, so you may need to list those as personal articles.

If you ever needed to file a claim, here’s one way to know what you owned: each year we suggest that you walk through your home, videoing. Pan over rooms, open drawers, and add commentary as necessary. This will make your side of the claims process way easier than trying to remember things after a very stressful loss. It’s also much faster than categorizing everything you own now on a written list.

Uninsured (and underinsured) motorist coverage:

If you’re in a car accident, this endorsement (extra add-on) will kick in to pay for your bodily injury expenses or vehicle damages if the other driver didn’t have insurance (or had inadequate insurance). Wisconsin requires uninsured motorist coverage (at least $25,000 per person and $50,000 per accident) but some states do not. We not only recommend it on your auto policy but would also recommend adding it to your umbrella (personal liability) policy.

This endorsement will step in for expenses beyond the underlying auto policy limits. Your medical insurance could be adequate for some scenarios, but the umbrella policy endorsement would provide other benefits that health insurance won’t, such as lost wages or payments for pain & suffering. The cost for this endorsement is usually an extra $100-200 per $1M of umbrella coverage and we recommend at least getting a quote to see whether that’s worth the peace of mind.

We hope you found these tips helpful. We don’t sell insurance, but we’re happy to work with our clients’ brokers and agents to find what’s right for their situation. At Boardwalk, property and casualty insurance is reviewed for our clients every two years – even if nothing obvious has changed. Whether it’s saving on insurance premiums, helping update coverages, or just confirming that everything looks good, our clients have peace of mind knowing they are well protected.