Q: I was recently injured during a softball game and my doctor said I could not return to work for 9-12 months. Am I eligible for New Jersey disability coverage? Are there other additional forms of disability coverage?
The Problem - Not Understanding Your Disability Benefits
Three in 10 workers entering the work force today will become disabled before retiring. An illness or accident will keep 1 in 5 workers out of work for at least a year during their working careers. Unfortunately, over 70% of working Americans do not have enough savings to meet short-term emergencies. Most people do not understand their disability benefits until they are disabled.
The Solution - Understanding Your Disability Benefits
New Jersey is one of only five states that offers disability benefits to their work force. Just a quick background on disability benefits and disability insurance. Let's start with a basic definition of a disability. It is an accident, condition or illness that prevents you from performing your job responsibilities. Interestingly, a maternity leave may qualify you for disability benefits. Unlike workers compensation insurance, which provides coverage for injuries on the job, disability benefits covers workers for non-work related events.
Before we dig into disability benefits, let's dispel two common myths about publicly provided disability benefits.
Myth No. 1: The State of New Jersey Provides Adequate Coverage
Unfortunately, NJ provides the lesser of two-thirds of your weekly wage or $502 per week. Benefits are limited to 26 weeks or $13,052 and are not payable immediately. Most individuals cannot survive on this meager benefit.
Myth No. 2: The Federal Government Provides Adequate Coverage
Unfortunately, the federal government's Social Security Disability Insurance (SSDI) program is available to those out of work for at least one year. A startling 70% of claims are denied. The average monthly SSDI benefit is a mere $978. Clearly, this is an inadequate benefit for those individuals that do qualify for benefits.
Disability Insurance (DI) provides a source of replacement income during your disability. It provides an income stream to partially replace the wages lost when you are unable to work for an extended period of time. Most policies limit coverage to 60%-70% of your previous income.
State laws and insurance regulations are designed to discourage workers from realizing the same level of income while disabled. In essence, it provides an incentive to return to the work force.
Disability Insurance Policies Should be Examined Based on Three Key Criteria:
1. Elimination Period
This defines how long you will be precluded from receiving benefits. The longer the elimination period, the lower the cost of the policy.
2. Benefit Period
This defines how long a benefit will be paid. A typical benefit period is through the age of 65. Coincidently, this is the age at which many workers are eligible for full benefits under Social Security.
3. Inflation Protection
This is a critical part of any policy. In order to keep up with the rising costs of living, most policies provide for inflation protection ranging from the 3% to 5% compounded on an annual basis.
Many employers provide a combination of short and or long-term disability benefits. These benefits may or may not be employer paid or subsidized. Although benefits provided by an employer may come with a lower price tag, due to group pricing, they are not generally transferable if you leave the employer. An individual DI policy provides much greater flexibility, as it is not tied to a specific employer.
Action Step - Establish Disability Insurance
Establishing DI insurance immediately reduces the financial and psychological burdens that can cause hardship when the need for disability benefits arrives. Like most insurance, the earlier you start your policy the lower the cost of the policy.
Skloff Financial Group
Question of the Month
By Aaron Skloff, AIF, CFA, MBA