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1) Financial Insurability: In most cases, a standard company will not insure you for more than your current annual income, and most will only want to see you insured for 50-70% of your current annual income, depending on how much your annual income is. They're going to calculate the maximum monthly benefit they deem you eligible for based on your current income and possibly annualizing your income as far back as 3 years. For example, if you earn $120,000/year, and the company you're applying to for coverage is willing to insure up to 70% of your income, your monthly benefit on the policy will be $7,000 ($120,000/12 x .70). If you were disabled, that policy would pay you $7,000 a month. How long would it pay out? See my other blog entry on the benefit period here.
2) Group Benefits: If you have a group disability income insurance policy through your employer, that potential benefit will play into any coverage you attempt to obtain on your own with an individual policy. Generally, I observe the majority of group policies to insure 60-70% of salaried income. If the employer is paying most or all of the premiums for the insurance, then the benefit is taxable, which takes that percentage down to about 45% (just a generalization for this illustration - I realize everyone's in a different tax bracket). Now if you say you want more of your income insured and you go to a company to get more coverage, they're going to calculate in the benefit you're getting from your employer policy. If that company was comfortable insuring you for a total of 70% of your income, they'd look at the 45% you have insured through work and possibly give you an offer to insure another 15-25% of your income. I suggest looking at my checklist for reviewing your employer-paid long term disability benefits.
3) Monthly benefit cap: Standard companies have limits on the maximum monthly benefit their respective policy could possibly offer. Generally, your top-tier companies insure up to $12,000 of monthly benefit, others as much as $15,000/month, some lower at $10,000 of monthly benefit. If you have the potential to earn more than $250,000/year, it is crucial to know what company you're getting into bed with. Not all companies are equal here. Further, your the occupation class a company gives you affects the monthly benefit cap. Wouldn't you want to start off with a company that give you the opportunity to have the greatest amount of coverage possible? Send me a message and I'll give you a current breakdown of 8 leading American companies and where their cap is.
4) Group Benefits cap: It works both ways. Your group disability plan also has a cap. I generally see these plans capping at $5,000 of monthly benefit. Some get as high as $10,000 of monthly benefit. I know of one medical residency program that caps benefits to only $3,000 of monthly benefit and a hospital plan that goes as high as $23,000 of monthly benefit. What you need to know is what your group plan caps at. If the cap is $5,000 and you make $120,000/year, even if the plan says it insures 70% of your income ($7,000 of monthly benefit), if the cap is $5,000, all you're getting is $5,000/month if you're disabled. This is a major factor in your decision making process for monthly benefit on your individual disability income policy.
5) Bonus income: Group disability insurance plans rarely insure income derived from bonuses. I see it in an employer plan once every couple years. Your run-of-the-mill employer plan will only insure income from salary. Bonus income isn't included in the coverage. If you make $70,000 of a base salary and $30,000 in bonus each year, and your employer plan insures 70% of your salary and doesn't cover bonus, you're getting $4,083.33/month in pre-tax monthly benefit, not the $5,833 of monthly benefit you might have been expecting. Your typical individual disability plan will insure bonus income, giving you an opportunity to get that income insured.
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