What Disability Insurance Actually Pays You

A friend of mine tore a rotator cuff reaching into an overhead bin. He is a dentist, so his hands are the entire business, and he was out for eleven months.

The thing that kept his house was a form he filled in during an open enrollment window he barely remembers, three years earlier, because the HR portal would not let him submit until he had picked something in every box.

I had never once thought about that box. I had renters insurance, health insurance, car insurance, a warranty on a laptop I no longer own. The paycheck itself I just assumed would keep arriving.

What the coverage is

Disability insurance pays you a share of your income when illness or injury stops you working. Short term disability covers the first stretch after you stop, usually somewhere between a few weeks and six months. Long term disability starts when the short term runs out and can pay for years.

The number that matters is the replacement rate, which is the share of your salary the policy actually pays. A lot of employer plans sit at 60 per cent. On a $90,000 salary that is $54,000 a year, or $4,500 a month.

Your mortgage does not drop 40 per cent to meet it.

The tax turn nobody mentions

Who paid the premium decides whether the money gets taxed. If your employer paid it and the cost never showed up as income on your pay stub, the benefit generally arrives as taxable income to you. If you paid the premium yourself out of money you had already been taxed on, the benefit generally arrives tax free.

Run it on the $4,500. Taxed at a rate of 22 per cent, you keep $3,510 a month. Against a gross salary of $7,500 a month, that is a real replacement of 47 per cent, not 60.

The gap is $990 a month, every month you are out.

Five things to look up in your own plan

• The replacement rate, and whether it applies to base salary only or includes bonus and commission. If half your income is commission, a base-only policy is half a policy.
• The monthly cap. A plan can promise 60 per cent and cap the payment at $5,000, which quietly becomes 40 per cent for someone earning $150,000.
• The elimination period, the waiting time between the day you stop working and the day the money starts. Ninety days is common, and ninety days is a long time with nothing coming in.
• The definition of disability. An own occupation policy pays if you cannot do your job. An any occupation policy pays only if you cannot do any job you are reasonably suited for, which is a much harder bar to clear.
• Portability. Most group coverage ends when the employment ends, so the policy protecting your income disappears on the same day the income does.

The cheap part

Short term disability through an employer often costs a few dollars a paycheck and sometimes nothing at all. Long term costs more, and an individual policy you buy yourself is priced on your age, your health and what you do for a living.

The dentist paid $71 a month. The policy paid him for eleven months.

Do this

Open your benefits portal and search the word disability. Find the summary plan description, the long boring document with the actual terms in it, and write down those four numbers: replacement rate, monthly cap, elimination period, who pays the premium.

If you cannot find all four in fifteen minutes, email HR and ask for them directly. They have the document and it is their job to hand it over.

Then put the monthly benefit next to your fixed costs. Rent or mortgage, utilities, food, minimum debt payments, insurance premiums. If the benefit does not cover that list, the number you are looking at is how much of your own savings a bad year would burn through, and that is a far more useful thing to know than the balance of your brokerage account.