What to Consider When Considering Disability Insurance

Last week, we looked at what the federal government provides in terms of short- and long-term disability benefits for its employees. Now that you’ve seen what is available to you as a fed, what about the solicitations you might have received in the mail or in your email inbox offering opportunities to purchase disability insurance? 

Long Term

The benefits of long-term disability policies are often offset by the amount of Social Security and retirement benefits you qualify to receive. In other words, the benefit will only pay the difference in the amount of the insurance minus your Federal Employees Retirement System and Social Security benefits. Because of this provision, it is unlikely that the benefit of the policy will be worth the premiums you would pay. 

Here’s a hypothetical example:

• Pre disability earnings: $3,250 biweekly or $84,500 per year 
• Long-term disability policy pays 60% income replacement: $50,700 or $1,950 biweekly
• Social Security disability (if qualified): $1,800 a month or $21,600 a year 
• Disability insurance benefit of $50,700 will be reduced by the Social Security benefit of $21,600, leaving an insurance benefit of $29,100 per year. 

But if you’re  approved for Social Security, you would most likely be approved for FERS disability. If that’s the case, the FERS disability benefit will generally provide 40% of your high-three average salary after the first 12 months, if you are under age 62 and not entitled to an unreduced voluntary retirement. This amount is then offset by 60% of your Social Security disability.

Consider this example:

• High three average salary: $80,000
• FERS would provide $80,000 times 40% = $32,000
• $32,000 minus 60% of a Social Security benefit of $21,600 = $12,960
• $32,000 minus $12,960 = $19,040 FERS disability payable
• This benefit may also be offset from the disability insurance: $29,600 (disability policy minus Social Security disability) minus $19,040 (FERS disability) = $10,560 per year remaining long-term disability insurance payment

Given the cost of long-term disability insurance, you might decide it’s better to have enough savings in your TSP account to provide this additional source of income. 

Keep in mind, though, that many long-term disability policies will provide benefits before you’re eligible for Social Security and FERS disability, which may make the insurance more attractive. For example, SAMBA is available to all active federal employees (with medical underwriting required). It provides long-term coverage that starts paying benefits after 60 continuous days of disability, which can help if you no longer have sick leave available and are facing leave without pay. This insurance provides a replacement of 65% of your salary. Biweekly premiums for a salary of $84,000 per year are $25.52 biweekly.

Another long-term disability insurance that caters to federal workers is the policy offered by Government Employees’ Benefit Association. GEBA’s plan provides tax-free payments up to $7,500 per month (not to exceed 67% of gross monthly salary). You can select a 90 or 180 day waiting period to begin receiving benefits.

Short Term

Short term disability insurance is designed to replace a percentage of your income if you experience a temporary injury or illness that prevents you from working, but are expected to recover. When evaluating such policies ask the following questions:

• What is the length of coverage?
• How much is the benefit and what is the premium?
• Will the amount increase with your salary?
• What is the elimination period? This is the amount of time you’re unable to work before the benefit starts.
• What are the medical underwriting requirements? You may not be paid benefits or qualify for coverage due to a preexisting condition.
• Are the benefits taxable?
• Is the insurance portable if you change employment?

You can compare policies available to federal employees through WAEPA, AFLAC, Anthem, and others. Make sure the underlying insurance company that underwrites your policy is reputable.

If you have adequate accumulated sick leave, you might decide having a supplemental disability policy is not worth the money. Or you might have sufficient cash reserves to carry you and your family through six months to a year of living expenses without the need for additional coverage. If you have a trusted financial adviser, they might be able to help you explore your options. Just make sure they’re not getting commissions to recommend one policy over another.