About Disability Insurance
If you asked an insurance agent which risk is the one most overlooked,
they would say disability insurance. In reality, disability insurance
is as important as (and in some cases, even more important than)
life insurance.
Disabilities and its effects on you and those around you
Disability creates enormous financial and emotional pressures for
the family because your role in the family would change and you
would have physical needs to be met.
The odds of becoming disabled are much higher than dying. In fact,
every year 12% of the adult U.S. population suffers a long-term
disability. If you're 35 now, your chances of experiencing a three-month
or longer disability before you reach age 65 are 50%. If you're
45, the figure is 44%.
These odds would not be a problem if people had substantial savings
that could be drawn on in the event of a disability. But that's
rarely the case, and any money that has been set aside has likely
been earmarked for goals such as college or retirement.
Disability Income
Unlike life insurance, you can't buy all the disability insurance
you may need. Usually you can get a maximum of 50% to 60% of your
monthly earned income before taxes. (Unearned or investment income
does not qualify because it continues even if you are disabled.)
You cannot get more coverage than that because the insurance company
does not want to deter you from returning to work.
Social Security - A Disability Supplement
Social Security does not just provide retirement income but disability
income as well. The bad news is that it's very difficult to qualify
for Social Security disability benefits as indicated by an 80% first
time failure rate. Just as with retirement benefits, your disability
income is dependent upon your "covered earnings," or the amount
on which you are taxed for Social Security. And even if you do qualify,
the benefits probably won't be enough for you and your family to
maintain even the most basic standard of living.
Workers Compensation
The second kind of disability insurance you may already have is
workers compensation. Most employers are required to provide this
coverage. The amount and duration of monthly benefits varies by
state. Workers compensation only pays if your disability is job-related,
typically lasts for only a few years, and the payments are low.
Just as with Social Security disability payments, it's wise to think
of workers compensation as a nice "extra" if you qualify, but don't
count on it.
Disability Insurance Variables
Insurance is always complicated and disability is no exception.
There are all kinds of disability policies and permutations. However,
the basics are simple.
The first variable is the amount of monthly benefit. Most
disability policies have a fixed monthly benefit that does not increase
with time, although you can purchase extra coverage, or riders,
that offer higher payment schedules.
The second variable is the definition of disability -- whether
it is "own occ," or the inability to perform the duties of your
specific occupation, or "any occ," the inability to perform the
duties of any job for which your education and training make you
qualified.
The third variable is the waiting period, or the amount
of time you must be disabled before benefits kick in. These waiting
periods can range from one week to two years, and the longer you
wait the less your disability policy will cost.
The fourth variable is the benefit period, or how long you
will receive monthly benefits once your policy starts paying. The
benefit period can range from six months to life, depending on what
you choose as well as what your insurance company is willing to
offer you.
In addition to these variables, there are other coverage options,
as well as a variety of other riders. The most important is a rider
that pays if you can only remain or return to work part-time. The
Social Security offset rider guarantees that if you qualify for
disability payments under your insurance policy but not for Social
Security (a frequent occurrence) your disability policy will pay
what Social Security should have. Another important option is the
additional purchase option, which guarantees you the right to buy
additional disability insurance in the future regardless of your
health at that time.
First Steps and Final Points
The first place to start in evaluating your disability needs is
to check with your employer. Just like other types of insurance,
group coverage is much less expensive than individual policies.
The main drawback to group coverage is sometimes you can only convert
it to a watered-down individual policy with weaker coverage. Your
employer may pick up part or your entire disability premium.
When you check out your employer coverage, keep these rules in mind.
If it doesn't pay at least 60% of your income, doesn't pay benefits
to age 65 and has a waiting period longer than your savings can
last, you need to look at private insurance as well. Individual
disability policies are not cheap, but you can't afford not to have
them if you need them.
Individual policies can vary enormously. The monthly amount for
which you can qualify, the price, and the benefit period amount
all depend upon the hazards of your occupation. If you are an attorney,
your disability insurance is going to be cheaper than if you are
an electrician. All of these factors are also affected by your physical
and mental health. (You can in fact be in excellent mental health
but even a few visits to a therapist for family counseling may only
make you eligible for a policy with a "mental illness" exclusion.)
Individual disability insurance is getting harder and harder to
get. When shopping, here are some rules of thumb to put together
your entire benefits package:
- Get the highest monthly benefits for which you can qualify.
- Try to get "own occupation" coverage for life. Many insurers now only offer the "any occ" coverage, which could force you into a new line of work.
- Get the longest waiting period you can afford. A policy with a six-month waiting period is much less expensive than one with a two-week waiting period.
- Get coverage for the longest benefit period possible. The goal is age 65 or even for life, but if your choice -- either imposed by the insurance company or by your pocketbook -- is a higher monthly income or a longer benefit period, opt for the longer benefit period.