What is Disability Insurance?
Disability insurance is a type of insurance that pays you a monthly benefit if you become disabled. You could think of it as an income replacement that can help you avoid the financial burden of losing your income if you are unable to work due to an accident, injury, or illness.
Why You Need Disability Insurance?
Moreover, disability claims are for things you may not realize, like physical injuries, a heart attack, or cancer. The Social Security Administration (SSA) says that about 25% of people who are 20 years old today will be disabled for 90 days or more before reaching age 67. Hence, becoming disabled is not only possible but is highly probable.
Types of Disability Insurance
There are two types of disability insurance: short term and long term, and most people need both. The difference is the length of the benefit period and when the coverage begins. Long-term disability typically has an elimination period (time before benefits begin) of six months and can last for many years or until retirement. While short-term disability, as the name implies, has a shorter elimination period (waiting period) before benefits begin and generally lasts up to 6 months.
How Much Disability Insurance Do You Need?
The amount of disability benefit is called coverage, and the amount of coverage you need depends on a variety of factors, such as your occupation and financial obligations.
You should create a monthly budget and extrapolate from there. Additionally, because your disability may have resulted in higher medical bills, you may want coverage that exceeds your current expenses.
What Are Lockheed’s Disability Benefits?
Lockheed offers short-term disability to certain employees. If you are eligible for coverage, you will be automatically enrolled.
- Cost: Provided to eligible employees at no charge.
- Duration of Benefits: The policy provides benefits for up to 26 weeks if you are away from work due to an eligible illness or injury.
Lockheed has two long-term disability insurance options. If you enroll when newly eligible, no evidence of insurability is required.
- Elimination Period (Waiting Period): Both policies have an elimination period of 180 days.
- Coverage Amount: Option 1: Provides 50% of your monthly base salary (any specialty pay/locality pay not included), with a monthly benefit cap of $25,000. Option 2: Provides 60% of your monthly base salary, with a monthly benefit cap of $30,000. Your monthly benefit will be reduced by “certain other income,” which includes disability income, Social Security, or employer retirement contributions. After receiving benefits for 12 consecutive months, a 3% COLA will be applied, and up to 10 annual increases will be applied.
- Disability Definition: During the first 24 months of your disability, your policy uses the “Own Occupation” definition (covered in more detail later). After the first 24 months, the policy’s definition changes to “Any Occupation.”
- Cost: You pay the full cost of coverage for both options. Because the cost is automatically deducted on an after-tax basis from your pay, your benefit will be paid tax-free. The cost of both options is based on your annual base pay as determined by the later of December 1st of the prior year or the date you were hired. If you are an eligible part-time employee, your cost of coverage (and the amount of your benefit) is determined using a 30-hour workweek.
|Age Disability Begins||Maximum Benefit Period|
|Age 62 or younger||Benefits will end at age 65 or 42 months|
|Age 63||36 months|
|Age 64||30 months|
|Age 65||24 months|
|Age 66||21 months|
|Age 67||18 months|
|Age 68||15 months|
|Age 69 or older||12 months|
Note: Some pre-existing exclusions do apply.
What About Social Security?
Many people assume they’ll get Social Security disability benefits to cover their expenses if they became disabled. But it isn’t easy to qualify for, and the benefits are typically not adequate to cover all non-discretionary expenses. Additionally, you must meet a strict definition of disability, and there are no benefits for partial or short-term disability. The Social Security Administration (SSA) will also review your disability based on a variety of factors to determine if you qualify, including:
- Are you working?
- Can you do other work?
- Severity of your disability
- Has your disability lasted or is expected to last for at least one year or to result in death?
- As well as your age, education, past work experience, and any transferable skills you may have.
If you qualify, benefits usually continue until you can work again on a regular basis. However, Lockheed’s group coverage will be reduced dollar for dollar by the amount of your Social Security benefit.
Do You Need More Insurance?
Most employer-sponsored disability policies aren’t meant to cover 100 percent of your lost income, and Lockheed Martin’s policies are no different.
Moreover, the policies have dollar caps on the amount of benefits paid. Therefore, depending on what your monthly base salary is, Lockheed’s policies may not provide the minimum coverage needed for all your non-discretionary expenses.
Generally, long-term disability insurance is the only type worth buying since you can cover short-term disability with vacation time and your 3-6-month emergency fund. The premiums for private disability insurance are higher than a group policy. Typically, you can buy an individual policy for 1 to 3 percent of what you earn. As with life insurance, the earlier and healthier you are when you purchase disability insurance, the cheaper it will be. But the exact cost of the policy will depend on a variety of factors, such as
- Occupation: The riskier your job, the more expensive the premium.
- Elimination Period (Waiting Period): A shorter waiting period is cheaper, but longer waiting periods could place a financial burden on you if you need the cash sooner. Typically, a 90-day waiting period is recommended.
- Coverage Amount: If you want to receive more income in the event of disability, the premium will rise. It’s a good rule to get at least enough coverage to protect 60–70% of your income, but coverage can usually be purchased for up to 75-85 percent of your income.
- Benefit Period: The longer the plan, the more it will cost. Policies typically cover terms of 2, 5, or 10 years or until retirement. The shorter the benefit period, the cheaper the premiums, but you may want to protect yourself until age 65.
- Disability Definition: Disability insurance usually offers two definition options “any occupation” or “own occupation.” This definition determines the severity of disability needed to qualify for benefits. Own Occupation: Pays full benefits if you’re unable to perform your job, even if you can do another job. Typically, this definition is more expensive, but it is easier to qualify for benefits. Any Occupation: Usually cheaper, but benefits are only paid if you cannot reasonably do any job. Meaning you could have to work at a different location, or perhaps in a lower-wage position.
Tax Note: Group disability benefits paid with pre-taxed dollars or provided free of charge are taxable, while private benefits are not.
People sometimes dismiss the need for disability insurance and focus on life insurance. Yet, the odds that you become disable due to an illness or an accident are much greater than the odds of premature death. Although Lockheed’s disability benefits are in-line with the standard benefits package offered by most employers, it may not provide the coverage needed. Therefore, you may want to supplement your group benefits with private coverage. If you’re disabled for years, or if you need to rely on disability insurance until you retire, having a source of income that’s close to what you earned can be the difference between getting by and living securely.
1. Council for Disability Awareness