By Grace S. Yung, CFP
If someone asked you to name your most valuable financial asset, how would you respond? Is it the balance in your 401(k)? No. Your home? Not likely, especially after the economic recession. How about your future Social Security retirement benefits? No again.
For many people, their most valuable financial asset is their ability to earn an income. This is because without a regular stream of cash coming in, you won’t likely be able to continue funding your 401(k) plan, make your monthly mortgage payments, or even continue to build work credits for your Social Security retirement income.
Will You Become Disabled During Your Lifetime?
Although most of us think that disability is something that will only happen to “someone else,” the reality is that even young and healthy individuals can become disabled in an instant. Accidents and chronic illnesses occur more frequently than many people realize.
According to the Social Security Administration, the likelihood of a 20-year-old becoming disabled before he or she retires is one in four. And based on statistics from the Council for Disability Awareness, 90 percent of wage earners rated their “ability to earn an income” as being either valuable or very valuable in helping them to achieve long-term financial security.
Don’t Rely on Social Security
Unfortunately, while many people assume they will be covered by Social Security for disability income “just in case,” these benefits can actually be extremely difficult to qualify for. This is because Social Security has a very strict definition of disability, and it uses both medical and non-medical criteria in order to determine whether you qualify. According to the Social Security Administration itself, proving that your medical condition is in fact a disability is typically the hardest part of a Social Security disability claim.
Based on Social Security’s parameters, in order to be considered disabled, you must have “an impairment, either medical, psychological, or psychiatric in nature that keeps you from being able to do substantial gainful activity.”
But it doesn’t stop there. In addition, your impairment must have prevented you from doing substantial gainful activities for at least 12 months, or be expected to prevent you from doing so for at least 12 months, or result in death. You will also need to have a certain number of Social Security “work credits” (based on your age) in order to qualify.
Because Social Security’s definition of disability is so strict, those who receive these benefits are typically only among the most severely impaired. Plus, going through all of the red tape in trying to obtain Social Security disability benefits could realistically take months, or even years.
If you do meet the criteria for Social Security disability benefits, there are several steps that you’ll need to follow in order to apply. First, you will need to fully complete an application. (The online application can be found on Social Security’s website at https://secure.ssa.gov/iClaim/dib).
There is a fairly long list of things that the Social Security Administration will want information on, so it can help if you have all of your information gathered before you begin the application process. This information includes:
• Birth and citizenship;
• Marriage (and divorce);
• Name(s) and birth date(s) of any children who 1) became disabled prior to age 22; 2) are under age 18 and are unmarried; and/or 3) are age 18 to 19 and are still attending secondary school full time;
• U.S. military service;
• Employer details for the current year, as well as the prior two years (not self-employment);
• Self-employment details for the current year and the prior two years;
• Bank information for direct deposit;
• Contact information of someone that Social Security may contact who knows about your medical condition(s) and can assist you with your claim;
• List of your medical condition(s);
• Information about doctors, healthcare professionals, hospitals, and clinics;
• Information about other medical records that may be available from vocational rehabilitation services, workers’ compensation, public welfare, prison or jail, an attorney or lawyer, or some other place;
• Job history;
• Education and training.
You can refer to the Checklist for Online Adult Disability Application by visiting https://www.ssa.gov/hlp/radr/10/ovw001-checklist.pdf. The best time to apply for these benefits is as soon as you become disabled. This is because even though the Social Security Administration estimates that the initial application process will last from 90 to 120 days, it often takes closer to six or eight months.8
Assuming that you qualify for Social Security disability benefits, you are required to receive your payments electronically. This can be set up so that your benefits are directly deposited into your account at a bank or other financial institution.
If you have been collecting Social Security disability benefits for 24 months, you will be automatically enrolled in Medicare Parts A and B at the beginning of the 25th month following the month in which you first started receiving your disability benefits. You can also apply for a Medicare prescription drug plan (Medicare Part D) via a private insurance company if you want prescription drug insurance.
Depending on your specific condition, if you are under age 65, you may also be able to qualify for Medicare hospitalization (Part A) and certain other healthcare benefits such as doctor visits (Part B)—even if you are not collecting Social Security disability benefits. For example, those who have permanent kidney failure that requires dialysis or kidney replacement will qualify for Medicare Part A if they have accumulated enough work credits. The spouse and/or child of a qualified worker may also be entitled to such Medicare benefits.
Even though there is a lot of information available on the Social Security Administration’s website, it can be helpful to consult with a Social Security expert as you move through the disability application process. A Social Security expert can answer any questions that you may have regarding the disability application procedure. A certified financial planner should be able to help you find a qualified individual to work with.
Disability Coverage through Your Employer
Some people will be covered for either a short-term or long-term disability through their employer. Certainly, one of the biggest advantages to having this type of coverage is that the premiums are usually lower than those of an individual policy. In addition, if you have a health issue that may prevent you from qualifying for a policy of your own, you are still likely to be accepted for group coverage.
Unfortunately, once you leave your employer, it is unlikely that you will be able to take this coverage with you—and, depending on your age and current health condition, obtaining individual coverage later in life can be somewhat costly.
It is also important to note that disability insurance is not the same thing as workers’ compensation coverage. Workers’ compensation (or workers’ comp) benefits are provided to you when you get hurt at work. Disability insurance benefits can cover you regardless of where an injury or illness occurs.
Shopping for Personal Disability Income Protection
When you apply for disability insurance, most companies will require that you complete an application for coverage. Just like with other types of insurance, the underwriters at the insurance carrier will want to know more about you personally, as well as your health condition and history. You may be required to take a complete physical exam and/or provide a blood sample. This will give the insurance company a much better idea of the risk that they will be taking on.
What to Look for in a Policy
When shopping for an individual disability insurance plan, there are several key factors to keep in mind, such as:
• Waiting Period – Disability insurance will typically require you to wait a certain number of days after your disability begins before income benefits begin to pay out. This is similar to a deductible in other types of insurance. A disability insurance policy’s waiting period may range from 90 days to one year. The longer your waiting period, the lower your premium will usually be.
• Length of Benefits – At the time you apply for coverage, you will also choose a length of time for your disability income benefits to last. This period may be as short as just one or two years, or until you reach age 65.
• Amount of Benefits – The benefit amount will also be a primary component of a disability insurance policy. You will usually be asked to choose a certain percentage of your income. You can also opt to have your benefit amount increase over time, in order to help keep pace with inflation.
Triggering the Disability Benefits
In order to start receiving benefits from an individual disability insurance policy, you will typically need to meet the definition of either partial or total disability. This will be defined in your policy.
While there may be some differences from one insurance carrier to another, most insurers will define total disability in two different phases. For example, in the beginning of your disability, you may be considered as totally disabled if you are unable to perform the duties of your specific occupation. However, after a certain time period has elapsed, such as two years, you may only be considered as totally disabled if you are unable to perform the basic functions of any job that you are qualified for, based on your past training, experience, and education.
Disability Income and Taxes
If you should start receiving disability insurance benefits, it is also important to know how they might be taxed. The taxation on disability income can differ, based on how the premiums were paid in.
For instance, if you paid all of the premiums out of your own pocket with after-tax income, then your disability income benefits will not be taxable. Alternatively, if you are part of a group disability plan and your employer paid all of the premiums, then your benefit will be taxed. (If you split the cost of the disability coverage with your employer, then the corresponding percentage that you paid will not be taxed, but the portion that your employer paid will be.)
The Bottom Line
Although most people don’t think about it from this perspective, your ability to earn an income throughout your lifetime can essentially be your biggest asset. This is because without an income, you won’t likely be able to accumulate any other assets.
Even if you have a disability insurance plan through your employer, it may not be enough. Plus, if you leave your job, you may or may not be able to take your disability coverage with you. In addition, if you already have an adverse health issue, it could preclude you from obtaining an individual disability insurance policy to replace the one you left behind.
As with other types of insurance, the best time to shop for disability coverage is before you need it. Working with a professional who can help you determine your specific needs as they pertain to your overall financial situation can provide you with coverage that fits your requirements. It can also help ensure that you don’t end up with too much disability insurance—and higher premiums.
This article is for general information only, and not intended to provide specific advice or recommendations for any individual.
Personal finance-related questions may be emailed to [email protected].
Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the 2014 September issue of Texas Monthly.