Do I Need Supplemental Disability Insurance?


If you have a standard disability insurance policy through your employer, are you adequately covered? In many cases, the answer to that question is no. That’s because standard disability insurance only replaces a certain percentage of your pre-disability income. If that won’t be enough for you to live on, you may need supplemental disability insurance.

What Is Supplemental Disability Insurance?

Supplemental disability insurance is coverage that exceeds your regular disability insurance policy. That’s important, because regular disability policies have strict benefit limits. It is entirely possible that the amount of the monthly benefit that you receive on a regular disability policy will be inadequate to cover your basic living expenses.

For example, an ordinary disability insurance policy may replace only between 40% and 60% of your regular pay. It may also put a ceiling on the dollar amount that you can receive, limiting it to not more than somewhere between $3,000 and $5,000 per month.

If you earn $10,000 per month, but your regular disability policy caps out at $5,000 per month, you may be forced to draw down your savings or to use credit cards in order to make up the difference between the benefit and your actual cost of living.

The Benefits of Supplemental Disability Insurance

The most obvious advantage to having a supplemental disability insurance policy is that your monthly benefit will be higher, and more closely resemble your pre-disability income level. That will give you a better chance of sustaining your finances through a period of long-term disability, without having to tap your savings or go into debt.

Supplemental disability insurance policies will typically pay as much as 80% of your pre-disability income. But that may not be the most important benefit.

Supplemental disability insurance also as a broader definition of income. For example, while a basic disability policy may recognize only your base salary in computing your monthly benefit, a supplemental policy will also take into account commissions, bonuses, and other forms of incentive income. Since these represent a substantial amount of income for many employees, including them in a benefit calculation will be a critical factor.

Even if you are accustomed to living on substantially less than what you earn, the extra funds that you receive through your supplemental disability insurance policy can be used to help you cover medical expenses. This is important because disability is usually accompanied by various therapies or even surgeries. And even though you have health insurance, there are always co-payments, deductibles, and uncovered expenses, that the extra cash from your supplemental disability insurance policy will help to cover.

Supplemental Disability Insurance is Even More Important if You are a High Income Earner

We touched on this earlier, but it’s well worth repeating since it is important if you are a high income earner. Since regular disability policies will only pay up to a certain point – generally no more than $5,000 per month – they may be inadequate if you are a high income earner.

If you make more than $250,000 per year, or more than $20,000 per month, a disability policy that replaces only $5,000 per month will be insufficient. Adding a supplemental disability insurance policy to your coverage certainly won’t make up 100% of your lost income, but it will get you a lot closer.

Similarly, if a large percentage of your income is from sources other than base salary – like commissions and bonuses – you also need to seriously consider adding a supplemental disability insurance policy to the mix. Again, regular disability policies do not take commissions and bonuses into account in calculating your monthly benefit.

If a regular disability policy replaces 60% of your pre-disability income, and you earn $10,000 per month, $5,000 of which is in commissions or bonuses, your monthly benefit will be limited to $3,000. That’s 60% of the base salary portion of your compensation only. The net result is that you will be forced to live on no more than 30% of your regular income. Should the disability persist for more than a few months, you may have to resort to tapping into your savings or going into debt.

How Supplemental Disability Insurance Policies Work

If you have a regular disability insurance from your employer, they may also offer supplemental coverage. Many employers however do not, so you may have to purchase your own policy. That can be a major advantage in itself, since you will be able to take the policy with you if your current employment ends.

But there may be an even bigger advantage to having your own policy. Since you will be paying the premiums for the supplemental disability insurance policy, the monthly benefits that you will receive upon filing a claim will come to you on a tax-free basis. If the policy is paid by your employer, then the benefits will be fully taxable as ordinary income. A private supplemental disability policy can reduce your monthly benefit, maybe even substantially.

If you take a private supplemental disability insurance policy, your application will have to be underwritten for approval. The insurance company will take into account your age, overall health, occupation, and income. This is similar to the process of approving an application for life insurance. The insurance company will want to know the type of risk you present and the likelihood that you will file a claim. But if you have qualified to purchase life insurance in the past, you’ll probably have little difficulty with a supplemental disability insurance policy.

There are a lot of considerations that go into purchasing supplemental disability coverage. We can help you get the right policy at the best possible price. Fill up the form below and we’ll get back to you.

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