Protecting Your Earning Power With Disability Insurance
You probably have life insurance to protect your family’s lifestyle in case you die prematurely. But have you considered how your family would cope if you were unable to work for a lengthy period due to illness or injury? Only 28% of workers have some form of disability insurance (Source: SmartMoney, July 2005). Many people ignore disability coverage, hoping they won’t be affected by a disabling injury or illness. However, the Society of Actuaries indicates that an adult has a one-in-seven chance of dying before age 65, but a one-in-three chance of being disabled for at least three months.
Consider disability insurance if your current assets won’t support you until age 65. To see if this is the case, review your available options. Determine how much you need monthly to pay essential expenses and what income sources you could count on if you could not work. Review the following questions to determine if you have adequate coverage in this area:
Will Social Security provide disability benefits? The criteria for benefits are very strict — you must be unable to work at any job, expect to be completely disabled for at least one year, and have contributed to the Social Security system for a sufficient length of time. Approximately 37% of those who apply qualify. Even if you do qualify, benefits tend to be modest. As of June 2006, the average disability benefit was $943 (Source: Social Security Administration, 2006). Your annual Social Security Statement indicates what disability benefits you can expect.
Does your employer provide disability insurance? Many companies provide short-term disability insurance, which covers 100% of your salary for three to six months. Long-term disability insurance is typically less common and less generous than short-term plans. Policies frequently have strict definitions of disability, pay no more than 60% of your base salary (bonuses and profit sharing generally are not included in benefit calculations), pay benefits for only two to five years, and do not provide cost-of-living adjustments.
Do you want to use other personal assets? You can access individual retirement accounts (IRAs), annuities, or 401(k) plans without penalty if you are disabled. But first decide whether you want to risk depleting your retirement fund or children’s college fund due to a disability.
How much of your income should disability insurance replace? You should ensure that your available resources and benefits from disability insurance equal at least 60% of your pretax income. Many insurers limit coverage from all disability policies to 60% to 70% of your salary to provide an incentive to return to work. Make sure the total of your employer-provided insurance and individual coverage does not exceed the maximum that will be paid, or you could end up paying for coverage you will not receive. Insurers typically require documentation of income and may limit the maximum monthly benefit.
Are there any significant differences between employer-provided insurance and individual policies? You typically have no choice regarding the benefits offered by your employer, while an individual policy can be tailored to your needs. The most significant difference, though, is the tax treatment of any benefits. If premiums are paid by your employer, benefits are taxable. If you pay the premiums, benefits are tax free. This will have a significant impact on the amount available to pay your bills. It may make sense to reimburse your employer for the cost of this insurance so any benefits will be tax free.
What provisions should you look for when purchasing an individual disability policy? There are several provisions you should pay special attention to, including:
• The definition of disability. There are three basic types of coverage: own occupation, any occupation, and income replacement. Own occupation pays benefits when you can’t work at your specific occupation. Many professionals, such as doctors and lawyers, opt for this coverage. However, due to substantial claims, this coverage is now more difficult to obtain. You may only be able to find own-occupation coverage for a specified period, with the policy then converting to any-occupation coverage. Any occupation coverage means you must be unable to work at any occupation your training and education would be suited for. Income replacement policies pay the difference between what you were earning before the disability and what you are earning now.
• Noncancelable or guaranteed renewable. Noncancelable means you can renew the policy every year at the same premium. Guaranteed renewable means you can renew the policy every year, but the premium can increase as long as it is not done so in a discriminatory manner. Either provision will ensure the policy won’t be canceled due to medical problems.
• Waiting period before benefits begin. If you have other resources to rely on for the short term, such as sick leave, personal savings, or short-term disability coverage, you can increase the waiting period to reduce premiums. Waiting periods can range from one week to two years, but the most common option is a 90-day delay in benefits.
• Length of benefits. Disability insurance is designed to protect your financial situation in the event of a serious disability, so coverage should last for the long term. You can obtain lifetime benefits, but you may only need benefits until age 65, when presumably you could collect Social Security and other retirement benefits.
To search for Disability Insurance you may want to visit the ManagingMoney.com Insurance Center. Here you can obtain disability insurance quotes from multiple agents.