Do you have enough disability insurance coverage? If you need to purchase private coverage, how can you get the most for your money? Have you neglected to protect what could be your most important financial asset? For many individuals, this is not the home or portfolio- it's earning power. This Financial Guide provides you with information to assist you in determining how much disability insurance you should have.
Even if your employer provides you with disability coverage, it's vital to examine the terms and conditions of that coverage, since it may not provide you with adequate coverage to meet your needs.
If you couldn't work, how long could you continue to pay your bills? Chances are, whatever employer-provided and government-provided coverage you have is inadequate, and you need to provide yourself with private disability coverage. Here are guidelines designed to ensure that you are adequately covered.
Planning For The Worst-Case Scenario
Many of us have life insurance, however very few of us have long-term disability coverage. Yet according to statistics, workers are more likely to sustain a long-term disability (one lasting longer than 90 days) than die at an early age. Long-term disability insurance is fairly expensive, and people tend to think that they will be protected by workers' compensation or other sources. However, Social Security, workers' compensation, and employer-offered long-term coverage are often inadequate.
Note: We'll show you how to check up on the adequacy of various sources of coverage in this Guide
Here's a typical disability scenario- one that could happen to anyone.
Example: Roger Roe, a former executive for a large company and currently self-employed as a consultant, earns $200,000 per year. Last year, his osteoarthritis suddenly became much worse, and he could no longer bend his back, lift anything, or stand in one place for longer than a few minutes. Roger was forced to discontinue his consulting business, and attempted various career changes, none of which panned out. Fortunately for Roger, he had taken out a disability policy years ago, and had continued paying the $2,000 per year premiums. The policy will now pay him $20,000 per year in benefits-a badly needed income.
Checking Up On What You Have
Here are some suggestions for investigating the disability coverage you may already have, in order to find out whether it is adequate to meet your needs.
If your employer provides long-term disability coverage-which must usually be paid for by the employee- it's a good idea to buy it. The premiums are probably discounted from what you'd pay for a private policy.
However, take a good look at what the employer-offered policy covers, and buy a private policy if you decide you need it. Many employer-provided group policies are inadequate in that they limit either the term of the coverage or the amount of benefits paid. For instance, benefits may last only a few years, or benefit payments may represent only a small part of executive salaries.
Check up on the following:
- How long does the disability coverage last?
- How much is the benefit?
Note: Group plans may have a benefit cap of $5,000 per month. Individual plans may also have such a cap.
- What percentage of your income are you covered for?
Note: Generally, you cannot obtain insurance for more than 60% of your income.
Tip: Tax-wise, you're better off paying the premiums yourself, instead of having your employer pay them.
- If you receive bonuses or commissions, are these covered by the group policy? If not, and if bonuses or commissions make up a substantial part of your income, you'll probably need supplemental coverage.
- What is the definition of disability in the group policy? Own-occupation, any occupation, or income-replacement? (Please see the discussion of these three terms in the section on private policies.)
Worker's compensation covers injuries that happen on the job. Benefits vary widely from state to state, since benefit amounts depend on state provisions. The average weekly maximum is about $450, while the average weekly minimum (where there is a minimum) is $90. Most states pay benefits for the employee's lifetime in cases of permanent total disability.
Tip: To get details on worker's comp benefits, contact your state's Department of Labor.
In addition to the requirement that an injury be work-related, the payments you would receive under worker's comp may be inadequate.
Veterans whose disability is related to a service-related injury may be eligible to receive disability benefits in certain states. If you are a veteran, find out whether a disability fund exists in your state.
Social Security provides long-term disability coverage. However, more than half of the individuals who apply for Social Security disability are denied coverage, and the system leaves many gaps. Further, the payment amounts-from $500 to $2,000 per month--may be inadequate for many individuals.
Planning Aid: Standard And Poor's Insurance Ratings will allow you to find S & P ratings and financial strength ratings of various insurance companies.
What To Look For In A Private Policy
If you decide you need supplemental coverage, here are some things to look for in a private policy, as well as some suggestions for getting the most for your money.
Be Ready To Prove Your Income Level
A disability insurance company will usually not cover you for more than 60% of your income. Look for a policy that provides coverage for this level.
When you shop for a disability policy, be ready to prove your income level.
Watch Out For The "Definition Of Disability"
The definition of disability in a policy is extremely important. It tells you under what circumstances you will qualify to receive benefits.
Own-occupation coverage pays benefits if you can't work at your chosen field-e.g., attorney or teacher. Own-occupation policies are the most expensive type of disability coverage because they provide the broadest coverage. (If you cannot perform the duties of your own occupation, you can take a job in a related field, make a decent income, and still collect the benefits.)
Any-occupation coverage pays benefits if you can't work at any occupation for which your education level and training has prepared you. Thus, if you can no longer perform the duties of a nuclear physicist, but you can teach physics at college level, you will not receive benefits.
Income-replacement policies, which are less expensive than own-occupation or any-occupation, replace whatever portion of your income you are no longer able to earn.
The longer the waiting period before benefits kick in, the less your premium will be. If you have adequate sick leave, short-term disability, and an emergency fund, and can support a longer waiting period, choose a policy with a longer waiting period.
Waiting periods can last as long as 730 days.
How Long Will Coverage Last?
It's a good idea to get a benefit period that lasts until age 65, at which point Social Security payments will begin. Be aware that many policies cover you for only two to five years, an inadequate period.
Unless you are so young that you haven't yet had time to qualify for Social Security, a policy that provides lifetime benefits, at costly premiums, is generally not worth it.
If you are able to work only part-time instead of your previous full-time hours, will you receive benefits? Unless your policy states that you are entitled to residual benefits, you won't receive anything unless you are totally unable to work.
Note: Residual benefits may be added on as a rider in some policies.
Non-Cancelable vs. Guaranteed Renewable
The difference between these two terms is very important. If a policy is "non-cancelable," you will pay a fixed premium throughout the contract term. Your premium will not go up for the term of the contract. If it is "guaranteed renewable," your premiums could go up.
Planning Aid: Please see Disability Insurance: Where to Buy Coverage for information on the types and costs of disability policies from the Insurance News Network.
Riders And Options
These are all additions to policies, at a further expense to you.
An option to increase coverage gives you the ability to buy more coverage without being turned down for health reasons.
You will pay about 10% of your premium to have this option.
The cost-of-living rider, which can add 20 to 40% to your premium, pays you increased benefits after you become disabled.
If you qualify for Social Security disability, the insurer gets to decrease your coverage.
Tip: Take this rider if it is available. It will save you money on your premium.
This important rider allows you to stop paying premiums once you become disabled.
Tip: Weigh the cost of the waiver-of-premium rider against the cost of continuing to pay the premiums after disability.
This is an option that allows you some cash back if you do not collect on your disability coverage after a certain amount of time.
Tip: This rider is too expensive-about 50% of your premium. Don't take it.
Check Out Your Insurer
Before buying a policy, check the financial soundness of your insurer. If your insurer goes bankrupt, you may have to shop for a policy later in life, when premiums are more expensive.
- Try to get disability insurance on a low-load (commission) basis. Look at the policies offered by direct sellers such as the Wholesale Insurance Network of Tampa of USAA in San Antonio. (But don't buy insurance from an insurer that doesn't check out as financially sound.)
- If you're young, consider buying an annual renewable disability income policy. This is similar to term life insurance. Then, when you are older an more able to afford the policy, convert to a permanent policy.
- Try to get group coverage from a trade association or other organization you belong to.
- If you're female, look for an insurer that has unisex pricing. Otherwise, women will generally pay higher premiums.
- Investigate discounts that may be available.
George Rejda, Principles of Risk Management and Insurance, (Addison-Wesley, 1997), ISBN 0321014510.
Ben Baldwin, The Complete Book of Insurance: The Consumer's Guide to Insuring Your Life, Health, Property and Income, (Probus Publishing Co., 1996), ISBN 1557388806.
Emmett J. Vaughan and Therese M. Vaughan, Essentials of Insurance: A Risk Management Perspective, (John Wiley & Sons, 1995), ISBN 0471107581.
National Underwriter, Social Security in a Nutshell, (National Underwriter, 1998), 1-800-543-0874.
National Underwriter, Social Security Manual, (National Underwriter, 1998), 1-800-543-0874.