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Before Deborah Krotenberg suffered a devastating car accident, she paid little attention to how she would cover costs in case of a catastrophe: "I knew I had long-term-disability [insurance], but who ever thinks of it?"
That attitude is common when it comes to disability coverage, says Neil Austin of the Medstat Group, a benefits consulting firm: "The typical employee doesn't have a clue about it until he or she needs it." In fact, waiting until disaster strikes to start investigating your resources can leave you financially disabled just when you need money most.
Adding up your benefits
Here are the benefits you can expect to kick in when you become disabled:
- Sick leave. At minimum, you're likely to have some sick leave at full pay, typically five to ten days, longer if you've accumulated it over several years. Your employer may also provide short-term disability insurance, which picks up after sick leave and usually runs 26 weeks. (In California, Hawaii, New Jersey, New York and Rhode Island, state law entitles you to disability coverage for up to 26 weeks.) During that time you could get your full salary (after taxes) for six weeks, followed by 50% to 60% of your income.
- Worker's comp. If your disability is the result of a job-related accident, you'll also have access to worker's compensation, an employer-paid program mandated by most states. Worker's comp pays cash as well as medical benefits; like short-term disability, it's designed to provide help early on, usually within a week of an injury. But don't count on worker's comp to cover expenses if you're used to a big salary. States usually cap the benefit at two-thirds of the average statewide wage.
- Social security disability insurance. You'll be eligible for social security disability insurance if you've worked long enough under the social security system and your disability prevents you from doing any substantial work for at least a year. Those are tough standards, which only a third of first-time applicants meet (about half of rejected applications are overturned on appeal). You'll get the first check six months after you become disabled.
- Long-term group disability. You may assume -- or hope -- your boss has you covered for long-term disability. Better consult your benefits book. Only about 40% of workers in medium-size and large companies receive the coverage, and even fewer employees of small companies are protected. Further, you may not qualify for coverage unless you've worked at the job for a specified period, perhaps several years.
A standard group plan replaces 60% of income up to $5,000 a month; but some plans replace as much as 80% or as little as 50% of income, or cap the benefit at $3,000 monthly. A few policies provide annual increases of 2% to 8% or are tied to the consumer price index. Whatever the benefits, you'll probably have to undergo at least a 90- or 180-day waiting period before they kick in, ideally just as short-term coverage ends. And add a few weeks: Checks are retroactive to the previous earning period.
In examining benefits, you should ask what the definition of income is, says Jay Menario of Unum, one of the big disability insurers. The replacement calculation may not include overtime, bonuses, commissions or pretax contributions to a 401(k) plan, for instance, or your earnings may exceed the cap, skewing the percentage recovered. Even if you make a six-figure salary, the most you would receive with a $5,000 monthly max would be $60,000 annually.
And that's before income taxes, owed on any disability coverage purchased by your employer. The tax whammy hits so hard at all pay levels that "it's very difficult for people today to cover just the basic mortgage," says Linda Culliton of Mercer Inc., a benefits consulting firm.
Further, you can't pile up income from various sources to boost the total amount: Generally, programs coordinate so that worker's comp pays first, offset by social security and then by group disability.
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