Group insurance for
MSBA members

Safeguarding your income:
If you become disabled, where will your money come from?

You put a portion of every paycheck in savings. You keep on top of your monthly bills. You’ve signed up for your employer-sponsored disability plan. And can always tap into Social Security or Workers’ Compensation (if you’re injured on the job). So if your monthly income was interrupted due to illness or injury, you’d have everything covered, right?

Not necessarily.

No matter how careful you’ve been to safeguard yourself and your family against the loss of income, your “safety net” may not stretch as far as you believe it will, particularly if your disability is a prolonged one.

Protecting your income
Recovering from an injury or an extended illness is difficult enough without worrying about your family’s finances. But the truth is, if you become disabled, you should have income sources that total 60 percent of what you had been earning to prevent a financial crisis.

There are several ways to protect your income during these difficult periods, but the majority of options can be grouped into two categories: benefits that are sponsored by your employer or a government entity, and those that you secure for yourself.

Employer plans
If you are employed full-time, it’s likely your employer offers some form of “sick leave.” Often this is a short-term benefit that protects your income as you recover from an illness or injury.

In addition, most mid- to large-size employers offer a long-term disability benefit to their employees. These benefits are designed to replace some portion of monthly income, typically about 60 percent (before taxes) of what you had been earning. Coverage may vary, depending on your ability to work. Some plans pay benefits only if you are unable to work; others restrict benefits once you can resume working part-time.

Employer plans are an affordable option for most people because normally, part of your long-term disability coverage is paid by your employer. But there are some disadvantages:

• If your employer pays for your disability benefits, your disability check is subject to income tax, which could reduce your actual payment by 20-30 percent, depending on your current tax bracket.
• Employer-paid plans often only cover a disability for certain time, usually three to five years. If you’re permanently disabled after this time period, you’ll have to find another source for your income.
• Employer-paid plans often have long waiting periods (up to six months) before they start making payments.

Workers’ Compensation
Most states take precautions to protect employees who are injured “on the job.” These precautions form your state’s Workers’ Compensation Laws, which mandate that all employees must have some sort of coverage—either through private insurance or state fund.

Workers’ Compensation Laws were set up to prevent workers from suing their employers for their injuries. Workers’ Compensation benefits usually cover medical expenses, payments for incapacity to work (both temporary and permanent disability) and often vocational rehabilitation. The amount of benefits you receive varies according to your state and your type of disability.

Most states pay about two-thirds of your income, which won’t be taxed. However, many states set a maximum limit on this amount (usually based on the average wage in your state), which may be less than two thirds of your gross income. (Check with your state department for how much they’d pay if you were injured on the job.)

Social Security
In addition to providing retirement benefits, Social Security also offers disability benefits to salaried workers. The program bases its payment structure on your salary and how long you’ve been contributing to Social Security.

While Social Security offers a long-term program of support, there are several restrictions and disadvantages:

• You must be unable to work in any job, not just the one you currently hold.
• You aren’t eligible for payments until you have been disabled five months or more.
• Your benefits may be reduced if you’re receiving payments from other sources, like your employer-paid plan.
• Social Security benefits are also subject to federal income tax.

Other sources
Depending on the circumstances of your illness or injury, and other factors related to your job and income level, you may be eligible for additional sources of disability income. These could include disability pension payments for veterans; benefits from an auto insurance policy that protect income if you’ve been injured in a vehicular accident; and Medicaid, which is designed for persons with few assets.

What to know about private plans
Private long-term disability policies are good solutions for those whose employers don’t offer affordable disability coverage that pays up to 60 percent of your income or for those who don’t qualify for government programs. They are also good options for supplementing benefits from other sources.

If you own your own practice, purchasing private disability and workers’ compensation policies helps protect not only your income but the viability of your business. You can help cover the overhead expenses of the business, protect one partner in a practice when another becomes disabled, and you could even get paid as you rebuild your practice following a disability.

Like employer-paid plans, private policies vary widely in their coverage, from length of coverage, to size of benefits, to payment schedule. You can select the options that best suit the needs of your household or business, even adding such features as renewability and cost-of-living adjustments.

You may also choose to purchase disability insurance through a group plan, made available through your employer or through a professional association. These policies often represent the best value because of their affordability. And unlike long-term disability coverage from other sources, because you pay the policy premiums for a private or group policy yourself, any benefit payments you receive are not subject to income tax.

Playing the tax card
As you plan to protect your income in the event of a disabling illness or injury, don’t overlook a critical factor in your calculations: taxation.

If disability benefits are subject to taxation, such as with employer-paid or most government-sponsored plans, the true value of what you receive in benefits is significantly reduced. For example, if your employer’s plan is designed to replace 60 percent of your monthly income, it may actually represent only 40 percent of your income after taxes. Private long-term disability plans, on the other hand, are not subject to taxation. If you become disabled, you receive the full benefit amount for which you are eligible.

Coordination of disability benefits
Coordination of benefits is the process of working with other coverage (employer coverage, private coverage or government-sponsored benefits) that you may have to share in the cost of providing benefits. This is a very common practice that attempts to make sure you don’t receive more in benefits than you would if you were working.

When you file a claim for disability benefits, you will be asked to provide information on other coverage you may qualify for, including employer coverage, private coverage, workers’ compensation, Social Security or other sources. If your disability happens on the job, you’ll most likely receive all your benefits from your state workers’ compensation program.

However, if your disability occurs outside of work, you’ll need to rely on your employer or other sponsored coverage for benefits. Most insurance companies only allow you to collect up to 60 percent of your income. So if your employer covers you for this amount, then you can’t receive benefits from anywhere else. But if your employer’s plan pays less than 60 percent, then your coverage can coordinate with other sources up to the 60 percent limit.

If you decide to file for Social Security benefits and combine them with your other coverage, Social Security will reduce its benefits so that the total you receive is no more than 80 percent of what you earned before the disability. It’s important to note that Social Security denies about 70 percent of all claims, so it should not be used as your primary source for income if you become disabled.

Opportunity for MSBA members
If you’re a member of the Minnesota State Bar Association in good standing, you have an opportunity to protect your income in the event you become disabled.

Coverage is available at low group rates, made available only to MSBA members. Perhaps most importantly, any benefits paid to you are tax free. Call 1-800-501-5776 for details on MSBA-sponsored insurance plans.