Recently, I worked with a client, who we’ll call Ozymandias. Ozymandias signed up for short-term disability insurance, purchasing the insurance policy through his employer. With each pay period, deductions were made from his paycheck, paying for the group disability policy. This sort of setup – paying for disability insurance through your employer – is available at some of the Big Four employers. But unlike the employee benefits that can be found at the Big Four, Ozymandias was opting to buy into a short term policy. (Both Deloitte and PwC offer the chance to buy into additional long -term disability coverage, but not short-term coverage.)
Should this be happening? Should Ozy be spending his hard-earned money on a short-term disability insurance policy? And if so, should he be doing it through his employer? Before we answer these questions, we’ll review some of the basics of disability insurance. If you think you’re a master of disability insurance, feel free to skip to the section Do I Need Short-Term Disability Insurance?
What is Disability Insurance?
Disability insurance pays you in the event you become so extremely disabled that you’re unable to go work. This is why disability insurance is also known as income-replacement insurance. Whatever you call it, disability insurance is the way to insure you future income stream.
Do I Need Disability Insurance?
Probably. If you’re the target audience for this blog, you’re young, and possibly an employee of Deloitte or one of the other Big Four: KPMG, PwC or E&Y. And, if you’re young, you need disability insurance.
Group vs. Private Disability Insurance
When you purchase disability insurance through your employer or a professional association, you are purchasing a group policy. This is different from purchasing an individual, or a private, policy. To illustrate the difference between a group disability policy and a private disability policy, let’s use an example with Joe Danger, a practicing CPA at Deloitte:
Deloitte offers a base long-term disability insurance (LTD) policy to its employees at no charge. It’s a free benefit – one of the many perks of working at Deloitte. Deloitte even taxes its employees on the value of the premiums so that any benefit Joe receives is tax-free.
Since Joe gets his disability insurance policy through his employer Deloitte, Joe has a group policy. Each of the Big Four offer different combinations of long and short term disability insurance benefits. Since all of these policies are run through the employer, these are all group policies. Any employer policy is a group policy.
Group policies might be less expensive than a private policy, but the benefits are usually better with a private policy. When it comes to disability insurance, the value of the benefits lay in:
• what percent of your salary you can expect to receive in the event of disability
• how soon you can collect benefits (i.e. how long the waiting period, or deductible, is)
• what exactly defines you not be able to earn an income because of your disability
Let’s illustrate with the example below:
Joe Danger knows that the group policy provided by his employer, Deloitte, won’t pay benefits past two years if he can work at a lower-paying job (Wal-Mart door greeter) – even though he won’t be able to work at his regular occupation as an accountant. So, Joe contacts his local insurance agent to shop the market for a disability policy that will insure him for his own occupation for the rest of his life.
The above is an example of group versus a private disability policy. A private disability policy is a good way to supplement the free policy that Joe’s employer, Deloitte, provides for him. The private policy fills the gap in coverage left by the employer policy.
Short vs. Long Term Disability Insurance
In another post on disability insurance, I go into the details of short and long-term disability insurance. Generally, short-term disability insurance can cover you for up to 90 days. Long-term disability insurance can cover you from 90 days to two years, or even until retirement. (Of course, longer coverage means a more expensive policy. This is why many group policies usually offer only two years of coverage under your own occupation: because its cheaper.)
Do I Need Short-Term Disability Insurance?
Deloitte provides both a base long-term disability insurance benefit, and a short-term disability benefit to it’s employees at no cost. PwC similarly offers free short-term benefits. But, if you’re not lucky enough to work at either Deloitte or PwC, should you buy short-term disability insurance?
Hopefully, you don’t need short-term disability insurance – not because you’ll never become disabled, but because you have a strong balance sheet. If you’re in a good enough financial position that you don’t need the coverage offered by short-term disability insurance, keep the expense of the premiums in your own pocket!
We’ve talked about this idea before: self-insurance. Self-insurance is keeping some cash on the side. In this instance, sufficient cash is six months of essential living expenses – like six months of cash to make your car payment, your rent, pay for groceries and anything else that you can’t go with out. With sufficient cash savings, you don’t need to pay an insurance company to provide you with a safety net because you’ve got your own safety net!
Ozy asks, “Should I Buy Short-Term Disability Insurance through my Employer?”
Let’s return to Ozymandias’s story:
Ozymandias makes regular paycheck deductions to purchase a short-term disability policy from his employer.
But should he? Let’s look at the numbers.
Ozymandias is paying roughly $1,000 a year to insure a maximum of $9,000 in benefits. Ozy has $25,000 in cash savings. In short, Ozy is paying a lot of money to insure just a little bit of income. The income he is insuring is far less than his own cash savings. In short, he has more than enough money to self-insure. Therefore, he doesn’t need to pay $1,000+ a year. That’s some serious savings!
Consider this helpful chart below to guide your decision on whether or not you need to purchase a short-term disability insurance policy: