While traditional disability insurance may be great for the average worker, it may not suit high-income earners as it only replaces a small portion of the income and places a limit on the benefit amount.
High-income earners have the option to purchase a private disability insurance policy that has high-limit disability coverage. Such policies provide a higher benefit amount for a relatively low premium.
Read below to find out more about private disability insurance and why it is suitable for high-income earners.
Why High-Income Earners Need Private Disability Insurance
For high-income earners, employer-based long-term disability coverage can be challenging because it usually only provides a benefit of 60% of the employee’s pre-disability income. For example, if someone is used to making more than $120,000 a year, a policy with a lower limit could not be enough to replace that income.
Additionally, many employee disability insurance plans only cover base salaries and will not include any payments received from bonuses, commissions, or any other sources. On the other hand, private disability insurance plans often provide more leeway in determining the amount and types of income that can be replaced.
There are a few extra perks to having private disability insurance. One is that you can take it with you when you switch jobs because it is portable.
In addition, the majority of employer-sponsored group insurance plans are pre-tax, meaning that you will be required to pay taxes on your disability benefits once you receive them. Payments from private disability insurance are generally free from taxes since the premiums are paid using after-tax dollars.
If your employer does not provide disability insurance, you may be able to obtain private disability insurance as a means of providing a fundamental safety net.
It is highly recommended that individuals with high incomes get individual disability insurance policies (or multiple sources of additional coverage) that address important concerns specific to highly-paid professions. In most cases, this would include coverage such as:
- Own occupation coverage, which kicks in if a condition renders you unable to do your present job duties, regardless of whether you might be able to manage other, usually lower-paying jobs.
- High-limit disability insurance, which incorporates additional sources of income apart from your base pay, and may have a maximum coverage limit that is much higher than that of regular group Long-Term Disability (LTD) plans.
Risks Faced By High-Income Individuals
Now, let’s take a closer look at the risks that are faced by professionals with high incomes in the event that they become disabled.
Household Debt
The Center for Microeconomic Data at the Federal Reserve Bank of New York found that households with people between the ages of 30 and 59 often carry the highest amounts of debt, which happen to be people’s peak working years.
According to its credit and household debt statistics, the largest portion of this debt is owed on mortgages and student loans.
We put our faith in our capacity to work so that we can settle those debts, provide for our family, enjoy life, and retire well. This is why it’s so important to have a plan B for your debt in the event of a disability.
Mortgage
Professionals with the right credit may be able to get mortgages of up to $1 million with little to no down payment, allowing them to make payments of $5,000, $10,000, or more every month.
People who buy higher priced houses are also likely to be responsible for paying significant amounts of property taxes and homeowners insurance, and they may also be required to pay fees to homeowners associations.
Student Loans
Students who graduate from medical school typically have a total student loan debt of $241,600, of which $215,900 belongs to medical school. According to the Education Data Initiative, this amount is six times more than the average college graduate.
How Does a High-Limit Disability Policy Work?
The market for High Limit Disability Insurance (HLDI) has grown in recent years due to the fact that very high-income earners do not receive the necessary coverage under individual disability or group long-term disability plans.
The HLDI are non-traditional policies that are purchased to supplement the group and individual disability coverage that is already in place.
HLDI policies provide the desired level of coverage above what is offered by individual and group long-term disability plans. HLDI plans are typically offered to people whose incomes are well into the seven figures.
How Does HLDI Work?
High Limit Disability Insurance is structured so that, irrespective of a person’s income level, disability compensation remains at 65% of income. Plans like this, which provide additional coverage on top of what is already available, can cost anywhere from $2,000 to $200,000 monthly.
In most cases, they will safeguard all of your revenue, not simply your monthly base pay. When determining eligibility for disability benefits, HLDI plans to rely on the “own occupation” rather than the more strict “any occupation” definition.
Own occupation means that you will continue to get your benefit payment if it is determined that you are unable to fulfill the essential duties that are required of your occupation even if you are able to work in a different occupation.
Traditional disability insurance policies use the “any occupation” criteria, which indicates that benefits will not be paid out if you are able to work other jobs.
The “own occupation” definition is important for individuals who have invested a significant amount of time and effort into developing a business or acquiring specialized skills.
Types of HLDI Policies
High-income earners are the best candidates for the majority of HLDI options since they offer a substantial degree of leverage for a relatively low premium. There are a variety of high-limit disability insurance plans to choose from, as explained below.
Lump-Sum Benefits
HLDI plans can be set up to give a lump-sum benefit payout along with the monthly payment if the policyholder becomes severely disabled. One-time lump-sum payouts can be made when the monthly benefit period ends or as soon as the participant becomes disabled.
Payouts in one lump sum can be more than $50 million, based on the policy, and they can help people who don’t have a lot of liquid cash.
Group, Individual, Employer-Funded, or Voluntary Benefits
There are different kinds of HLDI plans.
- Employers can provide HLDI plans either as an employer-paid benefit or as an employee-paid optional benefit targeted for a certain class of high-income workers, such as executives.
- Group plans can offer discounts, little to no medical evaluation, and full portability if a person leaves the group plan.
- Individual plans are also offered for private use, key person protection, and buy-sell arrangements.
What to Consider Before Getting Private Disability Insurance
Before you see your financial advisor to discuss disability insurance, we recommend that you familiarize yourself with the following points:
Learn About Your Employer-Paid Insurance Policy
This is the perfect opportunity to clarify your disability insurance coverage if you briefly skimmed over it when you started and are now confused about what you have. Schedule a meeting with a Human Resources (HR) representative to go over your coverage options. And while you’re doing this, check that you have a sufficient amount of life insurance. There’s a good chance you also need individual life insurance.
Consider Additional Sources of Income
If your income is supplemented by bonuses and other benefits, it’s crucial to discuss this with your advisor so that you can find a personal insurance policy that can cover any gaps in income.
Consider Multiple Policies
In the same way that you can have many life insurance plans to fulfill a variety of requirements, you can also have multiple disability insurance policies. The benefits that come from multiple policies complement one another.
Challenges in Getting Disability Insurance for High-Income Earners
You might believe that you are entirely safe and free from any potential risks if you have already purchased comprehensive supplemental disability coverage. However, everything is dependent on whether or not your claim for disability is approved.
If the insurance provider fails to recognize that you are disabled in the first place, then it will not make much of a difference whether or not you have the most comprehensive disability insurance alternatives.
Truthfully, getting disability insurance benefits can be a significant challenge, especially for high-earners and experts in complex professions.
This is due to two primary reasons: (1) disagreements involving cognitive impairments and (2) disputes against high-value claims.
Disagreements Involving Cognitive Impairments
The majority of the highest-paid professionals operate in fields that demand advanced cognitive skills, including planning and creativity, critical thinking, solving difficult problems, negotiation skills, emotional intelligence, and plenty more.
As a lawyer, business owner, executive, or other well-compensated professional, you may find it challenging to carry out your essential duties in the event that you suffer from a cognitive impairment, such as memory loss, depression, difficulty focusing, or an inability to make sound decisions.
Unfortunately, many insurance companies just look at the physical demands of a job and ignore the mental and emotional labor involved.
This is because, in part, they still use the government’s Dictionary of Occupational Titles (DOT), which was revolutionary when it came out but is now both oversimplified and out of date. The DOT places a heavy emphasis on physical labor and has not been updated or used officially by the government in over 20 years.
As a result, we face two significant obstacles. The first, as mentioned earlier, is getting the insurance company to acknowledge and accommodate the intricate and sophisticated mental and cognitive demands of your position. The second is providing evidence that you are unable to meet those standards due to your impairment.
Many professionals find that symptoms such as anxiety, difficulty focusing on complex tasks, or impaired judgment are entirely debilitating. However, they can be difficult to confirm because they may not appear on objective tests or scans.
When patients disclose self-reported symptoms to their insurance company, they are frequently met with skepticism. For approval, you might need to gather a substantial amount of medical paperwork, doctor’s notes, and testimonials from people you know and trust who can attest to the impact the impairment has had on your life at work and at home.
Disputes Against High-Value Claims
Disability insurance companies routinely deny valid claims. Insurance firms have financial incentives to find any reason to reject or postpone a claim. Keep in mind that these companies are profit-driven and that each claim denial serves to safeguard their financial line.
Insurance company denials can affect anyone, regardless of their income level. However, insurers often take an aggressive position against extremely high-income earners because of the large costs associated with paying out their claims.
Everything, from your medical data to your social media accounts, can be thoroughly examined. You shouldn’t be surprised if a private investigator is brought in to carry out surveillance, which may involve filming on public property and talking to nearby residents.
Do not try to “self-treat” or downplay your symptoms; instead, pay close attention to the treatment options your medical team has approved. Any evidence the insurance company finds that you are not disabled will be used against you.
Why You Need Disability Insurance in Advance
You should apply for insurance benefits while you are healthy. Purchasing individual disability insurance in advance allows you to secure the best terms. Getting the protection you need becomes quite difficult once you’re unable to work due to illness or injury.
While you are healthy, you also have the luxury of purchasing a customized disability insurance policy tailored to your needs. These options can help you keep up with rising healthcare costs by allowing you to upgrade your coverage as your income rises.
You can even receive coverage to help you substitute the money you put into your retirement plan or make sure you can pay back your student loans if you become injured or ill and are no longer able to work.
Conclusion
If you are a high-income earner, it is recommended that you purchase a private disability insurance policy that can help replace a major portion of your income in the event that you become disabled.
