I remember back to the busy months of preparation after my husband at the time and I discovered we were expecting our first child. In addition to the enjoyable activities of decorating a room and researching strollers, my mind jumped to some darker “what ifs.” What if my spouse dies while our baby is young? As a high school teacher, I was the lower-earning spouse by a distressing margin. My salary alone would not be able to cover all the bills plus day care. I felt nothing but relief when we obtained a life insurance policy for my husband just weeks before our precious daughter arrived. In my mind the worst-case scenario (early death of the family’s primary wage earner) had been covered.
As it turns out, I had fallen into a common perception trap. While our family’s financial future was secure in the event of a death, we failed to consider the more likely possibility of disability. Most workers estimate the chance of long-term disability during their career is only 1 or 2 percent. By contrast, the Society of Actuaries tells us that the average 40-year-old faces a 20 percent chance of experiencing a long-term disability (i.e., a disability lasting at least 90 days) before reaching age 65, and one worker in seven will be disabled for five years or more sometime before normal retirement age¹. The average worker is underestimating the likelihood of a serious disability by a factor of 10, 20 or even more!
Long term disability events such as extended illness, serious accident, mental health condition, or even a complex pregnancy or childbirth come with increased expenses for medical care, copays, and adaptive devices. In a mid-sized city like Champaign-Urbana, a rare cancer diagnosis can necessitate costly travel and hotel stays for a course of treatment and access to experts. Renovations may be essential to make a home accessible. This one-two punch of lost wages plus increased expenses makes a long-term disability event the true worst-case financial scenario for an individual or family.
How can you protect yourself from the chance of a disability? Just as life insurance can replace the income lost from a wage-earner’s early death, disability insurance replaces a portion of lost wages due to the inability to work. Said another way, disability insurance transfers the risk of losing your ability to work and earn an income to an insurance company. Disability insurance comes in two main “flavors”: short-term and long-term disability insurance. Short-term disability insurance replaces a certain percentage of your income (typically 70%) for a short period of time such as 3-6 months. Long-term disability insurance replaces 40-70% of your income for a longer period, potentially until retirement age. Those who follow conventional financial advice will have 3-6 months of living expenses saved in an emergency fund, making short-term disability insurance a low priority. By contrast, long-term disability insurance may be essential to financial security, especially for younger workers. Few families have enough savings to weather potentially decades of zero or diminished wages plus increased medical expenses.
The remainder of this post will focus on the long-term disability benefits offered by the State University Retirement System (SURS) to employees of public universities, community colleges and other agencies in Illinois. While the policy details likely differ, many employers offer disability insurance to employees. General principles from the discussion below may be helpful regardless of your present employer.
Employees who have two years of SURS service credit are eligible for a “SURS disability benefit”. If you become unable to perform the duties of your position, this benefit will start after a 60-day waiting period or when your sick days are exhausted, whichever is later. You will receive either 50 percent of the monthly salary you were receiving at the time you became disabled or 50 percent of your average earnings for the 24 months prior to the date you became disabled, whichever is greater. The cost of this disability benefit is paid entirely by the state. As a result, any benefits received are subject to federal income taxes. However, SURS disability benefits are not subject to Illinois state income taxes.
Receiving 50% of your salary while unable to work is better than nothing, but many would find it challenging to live on half of their previous income. Fortunately, employees of the University of Illinois and other public universities in Illinois are eligible to purchase an additional or “supplementary” Long Term Disability (LTD) policy through Prudential. The best time to purchase this University LTD policy is during your first 60 days of employment or during the benefits open enrollment period which occurs every May. If you enroll at a different time, an application process and “Statement of Health” are required. Those with pre-existing conditions such as joint problems or a previous cancer diagnosis could be denied coverage.
For those who purchase the coverage, the University LTD policy will start paying benefits after 90 days or when your sick days are exhausted, whichever is later. The benefit is two-thirds of your monthly pre-disability earnings (up to $12,000) reduced by other disability benefits such as the SURS disability benefit. In short, disability benefits do not “stack”. Receiving one monthly disability payment means other monthly disability benefits will be reduced accordingly. The University LTD benefit lasts 5 years. After 5 years if you are still disabled, you can continue to receive benefits until full retirement age if you are unable to perform the duties of any occupation for which you are reasonable fitted by education, training, or experience. Benefits for mental health conditions may be covered for only 2 years. The University LTD policy is flexible enough to allow a person experiencing a disability to return to work part time and still receive benefits, though they may be reduced.
The premiums of the University LTD plan are calculated using your age and salary. While collecting disability benefits, you do not have to pay premiums. Because the cost of the LTD insurance is paid by the employee with after-tax dollars, any benefits received are not taxed by either the federal government or the state of Illinois. As a result, a tax-free monthly disability payment of two thirds of your salary may be comparable to your usual monthly take home pay.
As with any insurance policy, we recommend reading the full contract to become familiar with the limits of your coverage. Although insurance policies can be notoriously dry, the University LTD policy has some interesting exclusions. Disabilities caused by war are not covered. Other exclusions include active participation in a riot and commission of a crime for which you have been convicted. And if you are jailed for your crimes, don’t expect your LTD policy to pay during your incarceration!
Who might want to enroll in the supplemental University LTD insurance? Generally, younger employees who have spent less time working at a public university in Illinois will benefit the most from this disability policy. Workers nearing retirement who have spent more time at a public university in Illinois will benefit the least. Consider the two examples that follow.
Employee #1: Rosalyn is a 45-year-old employee who has become totally disabled.
Annual Salary: $60,444
Monthly Salary: $5,037
Months of Employment at an IL public university: 48
SURS Monthly Disability Benefit:
⠀⠀⠀⠀⠀• Monthly benefit of 50% of salary ($2518.50) until 50% of SURS accumulated earnings ⠀⠀⠀⠀⠀($120,888) is received, then benefit stops even though disability continues.
⠀⠀⠀⠀⠀• Since this benefit is paid for by the employer, resulting benefits are taxable by the ⠀⠀⠀⠀⠀federal government.
University Voluntary Supplemental LTD Benefit:
⠀⠀⠀⠀⠀• Rosalyn’s cost for enrolling in the University LTD is $21 per month.
⠀⠀⠀⠀⠀• Monthly benefit of up to 66.67% of monthly pre-disability earnings ($3,358), reduced ⠀⠀⠀⠀⠀by SURS disability benefits.
⠀⠀⠀⠀⠀• Since this benefit is paid for by the employee with post-tax dollars, resulting benefits ⠀⠀⠀⠀⠀are tax-free.
⠀⠀⠀⠀⠀• For Rosalyn’s first monthly disability payment, she can expect to receive $3,358. The ⠀⠀⠀⠀⠀first $2,518.50 (through her employer-paid SURS disability) would be taxed at her ⠀⠀⠀⠀⠀federal tax rate only and the remaining $839.50 (from her self-paid University LTD ⠀⠀⠀⠀⠀policy) would be federally tax-free.
Employee #2: Edward is a 62-year-old employee who has become totally disabled.
Annual Salary: $220,000
Monthly Salary: $18,333
Months of Employment at an IL public university: 120
SURS Monthly Disability Benefit:
⠀⠀⠀⠀⠀• Monthly (taxable) benefit of 50% of salary ($9,167) until full retirement age (67)
⠀⠀⠀⠀⠀University Voluntary Supplemental LTD Benefit:
⠀⠀⠀⠀⠀• Edward’s cost for enrolling in the University LTD is $118 per month.
⠀⠀⠀⠀⠀• Edward’s monthly (tax-free) benefit of up to 66.67% of monthly pre-disability earnings ⠀⠀⠀⠀⠀is limited to the maximum benefit amount ($12,000), reduced by SURS disability ⠀⠀⠀⠀⠀benefits.
⠀⠀⠀⠀⠀• For Edward’s first monthly disability payment, he can expect to receive $12,000. The ⠀⠀⠀⠀⠀first $9,167 (through his employer-paid SURS disability) would be taxed at his federal ⠀⠀⠀⠀⠀tax rate only and the remaining $2833 (from his self-paid University LTD policy) would ⠀⠀⠀⠀⠀be tax-free.
These examples illustrate that a younger employee such as Rosalyn pays less for the University LTD insurance while receiving a greater benefit over time in the event of a disability. Employees such as Edward near retirement age may decide that the cost of this supplemental disability policy is not worth the potential benefits. Regardless of your employer, remember that it is all too common to underestimate the possibility of an extended illness or other event that would make full-time employment impossible. Take a closer look at the disability benefits offered through your employer and consider if additional long-term disability insurance would protect the financial health of your family.
Links:
⠀⠀⠀⠀⠀· Long Term Disability Insurance - System Human Resource Services ⠀⠀⠀⠀⠀(uillinois.edu)
⠀⠀⠀⠀⠀· FAQs about the SURS disability benefit
⠀⠀⠀⠀⠀· University Voluntary Supplemental Long Term Disability Plan (uillinois.edu)
Footnote:
[1] A Lawyer’s Guide to Filing Long-Term Disability Claims and Appeals: Sample.pdf (americanbar.org)