Understanding Disability Income Insurance Offered Through Work

By Tara Mallaley

Editor’s Note: If there’s one lesson we took away from the pandemic is our salaries may not be replaced when we leave work with an illness. About 50 percent of employees have some form of income protection coverage available to them through their employers.

Typically, employers who provide disability insurance offer both short-term and long-term benefits. Understanding the importance of insuring your income is critical to helping you navigate your employer’s open enrollment for benefits, which usually takes place during the autumn.

Disability income insurance is an essential tool in any financial strategy because it helps protect you from financial loss that can accompany an illness or injury by replacing a portion of the income you earn.

Disability coverage offered through work is a good benefit and a great start to helping protect the income you work hard for. It’s important to understand what is available through work, what it covers, and if it adequately protects your income.

Long-term disability plan options include:

1. 1. 1. 1. Group long-term disability coverage
        
        Individual disability insurance

Group long-term disability plans

- - - - Typically replaces a percentage of an employee’s base salary.
        
        Commonly offers one plan design for all employees with a cap on the benefit amount. (People who work at your company who earned larger base salaries may receive a smaller amount of income replacement based on the “cap” the employer establishes.)
        
        Employers tend to pay the premiums for this type of coverage. This means employees are required to pay the taxes on any benefit paid, resulting in less money received.
        
        Coverage generally terminates when employment ends.

Individual disability income insurance plans

- - - - Replaces a percentage of an employee’s complete salary (there is an option to cover variable compensation such as bonuses or commission) minus other existing disability income insurance you may carry.
        
        Offers design flexibility for classes of employees, including built-in policy features and riders that further enhance protection.
        
        Insurance premiums can be paid by the employer, employee or both. Policy benefits are tax free when employees pay the insurance premium with after-tax dollars.
        
        Coverage is typically portable (meaning you can take the coverage with you if you leave your current employer) with no changes to the premium or benefit amounts.
        
        Can supplement existing group long-term disability plans or can be offered as stand-alone protection if there is no employer disability plan in place.

Next steps

Find out if your employer offers one or both insurance plan options. Then get additional information about the coverage to identify how much protection you qualify for. This amount will determine if you have adequate coverage through work or if you need additional insurance to help supplement what is available through your employer.

To help get you started, find the answers to the questions below. Material is likely provided during in-person benefit meetings, online benefit webinars, or through your employer’s intranet site.

- - - - What percentage of your income is protected (does it replace 60%, 50% etc.)?
        
        Is the employer paying the premiums? If so, remember benefits at claim time can be taxable, which means you receive less money.
        
        What is the cap amount? This will identify if any portion of your income is not included, leaving it unprotected.
        
        Is variable compensation (bonuses, commissions, etc.) covered?

Once your research is complete, decide if you need additional coverage to add to the coverage available through your employer. If so, you’ll want to connect with your financial professional for help on getting the additional coverage you may need.