Individual disability plans - worth the peace of mind?

• Author: Menario, Jay
• Position: Personal Financial Planning

Suppose you were injured in a car accident and couldn't work for six months. If you had to rely on group disability coverage to substitute for your salary, could you live the way you do now? If the answer is no, you should be shopping for individual disability insurance.

No one wants to think about disability, but its implications are undeniable. Most people think they can count on their employer's disability coverage, and for the average person, that might be enough. But for financial executives, who are likely to have much more at stake, employer coverage is probably too skimpy. Without adequate insurance, they may be risking their homes, lifestyle and their children's future education.

Individual disability insurance coverage offers more protection than a typical group plan, and it allows you to customize your policy. Although it costs more than other types of disability insurance, it's often worth the peace of mind. However, individual disability insurance isn't right for everyone. To find out if you need the coverage and what kind of plan would work best for you, start with a hard look at your existing disability insurance coverage.

First, read the policy's definition of disability. You're probably covered for total disability. But your policy may have an "any occupation" stipulation, which means the insurance company can reduce or eliminate benefits if you can earn income from another occupation, even if the disability prevents you from earning a far greater income in your chosen profession. So, for example, the chief financial officer of an international company who must leave his position because of a heart condition might not be eligible for full benefits if he is able to teach finance at a local college.

Also, consider how much your employer-provided policy will pay. Most group disability policies replace about 60 percent of your salary, excluding bonuses and employer-paid retirement contributions. But some insurance policies cap the benefits, which may lower the income replacement level for executives. For example, a policy may return 60 percent of income, but cap the benefits at $10,000 per month. Understand how the caps in your policy function and weigh those limits against your income needs.

AX THE TAXES

Employer-provided group benefits are fully taxable. In contrast, benefits from individual disability income policies are tax-free. For someone in the 31 percent tax bracket, this difference amounts to about 40 cents on each...