March, 2008
Many People Aren’t Adequately Insured for Disability
Disability insurance protects your ability to earn an income. It provides money to pay your rent, mortgage and all your basic living expenses if you are injured or sick for an extended period. It is called disability Insurance or disability income protection, but think of it as income replacement when you are sick or injured and cannot work. If you are under 60, you are about six times more likely to be disabled for some period of time than to die.
It never hurts to consult a financial advisor with expertise in this subject, such as a Certified Financial Plannerâ„¢ professional.
Basic components of long-term disability coverage:
Monthly benefits: Long-term disability insurance is generally structured to pay 70 percent of your income up to your normal retirement age. See if the policy you’re buying offers you the chance to buy more insurance as your income increases in future years.
Benefit term: For each disabling incident, your policy may pay benefits for a certain period – two, five years or until retirement. It’s all in how your policy is constructed. Many policies may pay for life if you purchase this benefit and if you are disabled prior to age 60.
Buying younger is generally cheaper: Like health and life insurance, the younger you are when you initiate coverage, the less you’ll pay. Occupation enters into the picture because high-risk jobs (where disability is a greater work-related factor) tend to draw more claims. Like health insurance, the premium determination will consider whether you are male or female (women pay more for disability insurance because they tend to live longer and may work longer) your medical history, lifestyle, weight, and whether you smoke.
Non-cancellation provisions: Make sure that once you’re approved, the insurer can’t cut your coverage unless it decides to stop writing coverage for everyone in your job class. The provision should also state that the insurer can’t raise your rates.
Guaranteed renewable: This means your coverage can’t be canceled unless the insurer stops writing insurance for your job category. Unlike non-cancellable coverage, the insurer can raise the rates for everyone in the category.
Own occupation vs. any occupation: If you have “own occupation†coverage, it goes into effect if you can’t perform the functions of the job you’re now in. “Any occupation†coverage pays only if you can’t work at any job where you’ve been reasonably trained to do the tasks. For example, if you’re working a desk job, you could easily be transferred to a receptionist’s job or some other function within the company that you can now do or is your former position. That could significantly interfere with your recovery time, so consider the benefits of (specify) “own occupation†coverage.
Elimination period: Like a deductible in home, health or car insurance, the elimination period is a big cost determinant in disability coverage. Most policies will kick in after 30 days after you’ve been declared disabled. But if you specify an elimination period of 60, 90 or 120 days, your premium will be lower. An important point about the 30-day elimination period: the benefits don’t start accumulating until you’ve been laid up a month after the ruling date and you won’t get your payment until a month after that. Be very clear with your insurer when you’ll get your first check based on what elimination period you choose, and funnel the money you’ll need in the meantime to your emergency fund.
Partial payments/Residual benefits: Some policies may offer you ‘residual benefits’ or a partial payment if you’re less than 100 percent disabled, but still can’t perform all the duties of your job.
If you’re thinking about self-employment: You’ll likely need disability coverage. But the time to buy is while you’re still in your current job. Why? Because you won’t be able to prove your income once self-employed, so consider obtaining your desired coverage as you can before you leave.
March 2008 This column is produced by the Financial Planning Association, the membership organization for the financial planning community. It has been modified and is provided by Thomas A. Fisher, a local member of the FPA.
The material presented is believed to be from reliable sources and we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your own adviser prior to implementation in order to determine whether the strategies mentioned are appropriate for your specific situation.