Disability Insurance
Keeping all those plates in the air is never easy. Now imagine doing it while you’re disabled.
You depend on your income – so you need income you can depend on. We hope the next few minutes will help you appreciate the impact a disability could have on your lifestyle, your business and even your retirement.
Of course, the general plan is to stay healthy and grow an increasingly successful business or lifestyle…. all the while continuing to manage your personal life and financial life without a hitch. Sure it’s tough-but with hard work, so far you’ve been able to keep it all going.
But what if something unexpected should happen? What if, due to sickness or injury, you are unable to work for a period of months or even years? Imagine the questions you would have then:
- How will I pay the mortgage… the car loan… the kids’ tuition?
- How will my business or household run without me?
- How can I afford to recover?
- Will I be able to reenter my career when I’m better?
Disability income insurance (DI) can help answer these questions, because it pays you benefits during the time you need it the most.
A few minutes about the rest of your life
Life isn’t just about making it. At some point, it’s about keeping it-everything you worked so hard to build. Since you’re reading this, chances are you’re pretty well established in a successful career with a substantial income, and you’re wondering how to protect what you’ve built against a long-term disability.
Some quick questions and answers
- Disability? Am I really vulnerable?
- How can it affect me and my income?
- Who does it strike-and how often?
- How can I protect myself against it?
- Are there other alternatives to Disability?
It’s only income…. Or is it?
Income protection is important because income is important, and the higher the income, the greater it’s significance to your standard of living, your financial goals and your retirement savings. Look at it this way: If your income is in the upper brackets, then its value is probably reflected in the car you drive and the home you live in. Do you insure these and other assets against unforeseen risks? Naturally.
Is there a comparable risk that a long-term disability will interrupt your income before you reach age 65? Absolutely you wouldn’t underinsure your most valuable assets, so it doesn’t make sense to underinsure something as essential as you’re income-particularly if you are a highly paid professional. If that category applies to you, then the best income protection available is individual disability insurance.
Myth vs. Reality
Two of the biggest myths about disability are that it doesn’t happen to younger people and that it’s largely the result of a work-related accident. The reality is your odds of encountering a long-term disability-one lasting 90 days or more-before age 65 are: 1 in 3 at age 30, 3 in 10 at age 40, 5 in 22 at age 50 & 1 in 10 at age 60. (Note: statistics reflect those for men, chances are actually higher for women).
It may surprise you to learn that fewer than 14% of disabilities are caused by injuries – most are the result of illness.
**Are there other alternatives to Disability insurance?
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Disability happens and, for the most highly paid, it can cost thousands and even millions in lost income and added expenses. There are alternatives, to individual DI, such as dipping into your savings, applying for Social Security benefits or participating in a group long-term disability plan from your employer. But consider these points:
Personal Savings: Disability can be just as devastating to your family’s finances as a death. If you saved five percent of your income each year, a six-month disability could wipe out ten years of savings. Worse, as illustrated earlier, most disabilities that last 90 days are likely to last on the order of years.
Disability not only protects your income, it protects your savings and your plans for them!
Social Security disability coverage is far from guaranteed: Nearly 69% of all applicants are denied benefits when they make their initial claim. In fact, you don’t even qualify unless you have been disabled for five months and are expected to remain disabled for at least another 12 – or your disability is likely to end in death. Even then, the maximum benefit payment in 2002 was around $2,000 a month and benefits may be subject to federal income tax.
Individual DI takes a far more liberal view of what constitutes total disability. Plus, the benefits available are more realistically scaled to your actual income, enabling you to replace up to about 60% of lost wages. If you pay your premiums yourself with after – tax dollars, your benefits will be tax – free.
Group Long / Short– Term Disability Insurance may be available through your employer, and it may cover 50-60% of earnings excluding bonuses and pension contributions and minus any government program benefits you receive. If your employer pays the premiums, then any benefits you receive will be taxable. If you leave your job you will probably lose the coverage. Finally, if your disability allows you to work at another job outside your own occupation, you may or may not be considered eligible for benefits. Group plans offered to you through your employer are a valuable benefit especially if you do not have an individual DI policy.
Individual DI can cover not only base salary, but also bonuses and, with a few insures, pension contributions. Also, if you pay the premiums yourself, benefits are not subject to taxes. Most individual DI policies come with fixed premiums and non-cancellable coverage. Individual DI is also portable if you change jobs-even if you change careers.
Questions to ask when considering DI
When will the insurance company regard me as totally disabled? Different insurance companies use different definitions of total disability. The most favorable one is “own-occupation” which means the company will pay benefits if you can’t work at your own specific occupation even if you are working in another capacity.
How much do I get paid?
Up to about 60% of net salary or business income. Most insurance companies place a cap on the maximum benefit they will pay no matter how high your income is.
When do benefits start?
You or your employer can decide that when the policy is purchased. Benefits can start immediately for injury or 7 days after a sickness. Individual policies can start one month or up to two years after you become disabled.
**How long will benefits last?
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Typically, benefits are payable for two years, five years or to age 65. A few companies offer the option of lifetime benefits. If you are younger and just beginning to save for retirement, then you should consider lifetime coverage. If you are older and have substantial retirement savings, you may not need a benefit that extends beyond age 65.
Can my individual policy be changed or canceled, or my premiums raised?
If you pay for something, then you should own it. A good policy cannot be changed or canceled, even if your health or financial situation changes. It should also guarantee that your premiums will remain fixed until age 65, as long as you continue to pay them.
What if I want to change my coverage?
Look for individual policies that allow you to increase coverage to keep pace with the cost of living or increases in your income. Some offer optional riders that allow automatic or optional increases every year. Insurers sometimes add restrictions to benefit increases if applicants have reached a certain age – say 55 or 60.
What if I change jobs or careers?
One advantage of owning your own DI insurance is that it’s portable. You pay for it, so you own it and you can take it with you if you leave your employer – or if you go into a completely new field or ling of work.
**What if I’m only partially disabled?
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Some policies will pay benefits if you can only work part-time and lose income as a result. Some policies will pay benefits even if you don’t become totally disabled first.
If you own or share ownership of a business or professional practice, you might also consider protecting that investment.
Overhead Expense insurance provides reimbursement for the ongoing expenses of operating your business or practice if you are disabled and can’t work. These expenses can include rent on your premises, electricity, heat & air conditioning, telephone and janitorial services. Professionals may also be reimbursed for staff salaries and in some cases, a portion of a replacement professional’s salary.
Disability Buy-Out insurance reimburses the owners or partners of a business or professional practice in the event they need to buy out a disabled owner’s financial interest in the company. It not only protects a disabled partner’s financial investment in the firm, it also enables the remaining partners to keep the business healthy and active.
Finally, a disability can also interrupt contributions to your retirement plan. A very few companies offer special programs that use individual disability policies to protect your retirement plan contributions and may even protect those make by your employer in the event you become disabled.