Life and Disability Insurance Plans

What would happen to your family if you suffered a serious injury and could not work for a year or longer? What if you unexpectedly died? Would your family be taken care of financially?

The best way to ensure this is to have disability and life insurance. The good news? Many companies with more than 500 employees offer both disability and life insurance options as a benefit.

Your job? You need to analyze these benefits to make sure they are worthwhile.

Disability insurance

Too many employees give little thought to disability insurance. They may have taken out large life insurance policies. However, what if you are disabled and you cannot work? How will your family cope financially if you are the primary breadwinner?

This is where disability insurance is helpful. This insurance will pay a portion of your salary — often 60 percent of it — if you are disabled and can’t work. True, a portion of your income is not as good as receiving all of it. However, even receiving a percentage of your regular income might be enough to keep your family financially afloat until you can return to work.

Don’t think you’ll suffer a disabling injury? A survey by Sun Life Financial found that people are three times more likely to suffer a disability or injury that keeps them out of work for a year before they hit age 65 then they are to die. What does this mean? It means that disability insurance is every bit as important as life insurance.

Fortunately, many employers offer this benefit. Unfortunately, many workers pass on it. According to the Sun Life study, just three out of every ten employees has taken out disability insurance.

How disability insurance works

If you sign up for disability insurance from your employer, your company will take out a portion of your regular paycheck to cover the costs.

If you become injured or disabled to the point that you can no longer do your job and can’t return to work for an extended time, your disability insurance will kick in.

In general, there are two types of disability insurance offered by employers. Short-term disability insurance usually kicks in within 14 days of your disability. This insurance provides coverage that can last from six months to a year. Long-term disability insurance then takes over after this period.

Your employer’s disability insurance will come with certain restrictions. First, the insurance will only cover a portion of your salary. That number varies, but most plans provide disabled workers with 60 percent of their salary.

Some policies will provide a percentage only of your salary. With others, both your salary and any bonuses you earn are used to determine coverage. As a side note, very few plans will allow you to contribute to your 401(k) while disabled.

Some disability plans will come with a monthly cap on how much coverage you can receive. If you earn a high monthly salary, you might feel some financial pain here. If you make $20,000 a month in income and bonuses, but your disability plan has a $10,000 monthly limit, you will have to adjust your spending patterns until you can return to work.

Life insurance

Many employers also offer their life insurance benefits. You’ll have to decide, though, whether your company’s life insurance is worth your investment.

Company life insurance plans typically offer either a flat fee in case you die — say $70,000 — or a multiplier of your annual salary. Life insurance policies offered might pay out two times your annual salary. If you earn $60,000 a year, your life insurance will pay out $120,000.

There are two main questions you’ll need to ask before investing in a company life-insurance plan: First, is it worth it? Secondly, is it portable?

A company life insurance plan might not provide enough protection for the investment. It often makes more sense for employees to rely on life insurance purchased from outside companies. Most employees who do take out company-sponsored life insurance plans do so as a supplement to their main life insurance.

Portability is an important issue, too. You want to make sure that if you leave or lose your job you can keep your life-insurance benefits. Some policies offered by companies do not allow their holders to take them along if they find a new job or lose their current one.

Like all employee benefits, you need to analyze your company’s disability and life insurance options carefully. Researching employer benefits is far from enjoyable. However, only by doing this research can you make a decision whether these plans are a worthy investment of your dollars.