I was recently reminded of how important good long-term disability plans as someone was telling me about a couple of people they know where on the one hand a fellow years ago purchased the best long-term disability insurance program he could afford and unfortunately became disabled and has been collecting now on his policy for many years. The long-term disability insurance has been a huge benefit to their family as it has allowed them to maintain their standard of living and their home. On the other hand, his friend who is now facing a long-term disability but does not have a long-term disability insurance plan or life insurance. Unfortunately, it is all too common that self-employed people don’t have a good long-term disability plan.
The consequences of not having a long-term disability plan can be severe if one ends up having a long-term disability. It could result in a family home having to be sold to provide funds to live. It could also mean severely cutting back on expenses and other family members having to work to provide income. It could also mean depleting any savings targeted for retirement which could have other long-term ramifications.
When I became self-employed over 25 years ago one of the first things I did was purchase a very good long-term disability plan. Fortunately, so far, I have not had to use it, but I have felt good about knowing that if something did happen that our family’s income would still be OK. I consider the monthly premium just a necessary cost of working. Typically, a good long-term disability plan can be purchased for 1% to 3% of a person’s income. It just seems prudent to take this relatively small amount and use it protect the family’s income.
Long-term disability plans also have the ability to pay out very large sums of money and this should be considered when purchasing a plan. Consider someone earning $100,000 and having a long-term disability plan that provides them $60,000 per year or $5,000 per month on a non-taxable basis. If that person is disabled early on in their career and collects this benefit for 30 years this could be $1,800,000 even without any type of cost of living adjustment which is often added to good long-term disability plans.
We don’t seem to think twice about insuring our homes in case of fire, theft or damage and we pay out considerable amounts each year for our auto insurance. However, what is the chance that our house or car insurance might pay out nearly as much as our long-term disability insurance?
My advice is to make sure you have a very good long-term disability plan as it may be the most important insurance you own. If you have coverage through your employer’s group plan review the coverage to make sure you understand it and are comfortable with it. Recently upon review of one of our client’s group long term disability plans we found the amount it covered of his annual income was only about 30%. In this case our recommendation was to top up his coverage with a private plan that would provide him with more coverage.
If you are the owner of the business and covered through your business’s group long-term disability plan you will want to consider whether the coverage under this plan will actually work for you. Some group long term disability plans don’t offer partial disability benefits which make it difficult for business owners to claim as they typically will still try to do some work even if they are disabled. Unfortunately, some group long-term disability plans won’t pay out if the owner is still doing some work for the business. In this case a plan with partial disability coverage for the owner would be more appropriate of even a personal disability plan.
If you have any questions about long-term disability coverage please get in contact with us as we would like to be able to assist you in ensuring you have the right coverage in place.