Disability income insurance provides you with compensation to replace your income in the event sickness or injury prohibits you from being able to perform the major duties of your occupation.
While it is common for most people to insure their lives and material assets such as their homes, cars and valuables, many undervalue their option to sufficiently protect their most valuable asset: their ability to earn an income.
“Own occupation” policies pay benefits if you’re unable to perform your occupation, and you satisfy all other terms and conditions of the policy. The policy often has an own occupation period followed by any occupation period. The insurer does not change or switch the coverage. If the policy describes your work as “any occupation,” they will pay only if you can’t perform any occupation related to your education and experience. Many insurance companies switch from one definition to the other after you’ve been receiving benefits for a few years.
Total disability is sometimes further defined by its cause. Some policies may only cover a disability caused by an accidental injury. Some may only cover a disability caused by sickness. Some may cover disabilities caused by either accident or injury; it is critical that you study a policy’s definition of total disability before purchasing.
Personally-owned: Personal policies are usually non-cancellable, and guaranteed renewable-coverage can not be canceled provided premiums are paid, and the insurer can not change policy benefit and provisions.
Group, and Association plans: These plans offer limited benefits...the term of own occupation is usually limited to 2 or 5 years. After that, any work results in no benefits. Your employer or association can change or drop the plan, and leave you without any coverage. Additionally, the plan can be lost if you leave the company or group.
How long do you have to wait after the onset of a disability to receive benefits? Insurance companies refer to this time as the waiting or elimination period. You, as the insured, may choose this period based on how long you believe you can manage without additional income after becoming disabled. Choices range from 30 days up to two years. The longer the waiting period selected, the lower the premium.
You also have the choice of how long you would be paid disability benefits. This is called the benefit period. Options for long-term disability policies usually include one year, five years, up to age 65, or even for life if the disability continues. Short-term policies may have benefit periods ranging from 13 or 26 weeks up to as long as 52 or 104 weeks. If the benefit period is at least two years, the policy is generally considered long-term.
The amount of benefit for both short- and long-term policies generally ranges between half and two-thirds of earnings, with a cap on the maximum amount that will be distributed. Short-term policies frequently have a weekly benefit limit. Long-term policies usually cap at about $10,000 to $15,000 per month, though some may have higher caps.
Residual disability income is awarded when one’s earnings during partial disability are a stated percentage less than earnings prior to disability. Most typically, a person is residually disabled if, after the end of the elimination period, they are at work, but because of sickness or injury, are not able to earn at a rate of at least 80 percent of their prior income.
The Future Increase Option Rider provides the option to purchase additional disability benefits in the future, thereby helping one’s coverage to keep pace with their rising income, despite any changes in health or occupation. An Automatic Increase Rider provides a specified percent increase to the policy’s disability income benefit each year as determined by the rider. This is done despite any change in health, income or occupation. Cost of Living Adjustment Rider feature increases benefit payments to reflect increases in the cost of living and occurs while the insured is disabled and receiving a benefit. Many companies use the Consumer Price Index as a barometer to determine how much the increase will be.
Make sure that you are buying the policy from a company with experience in this business. Many companies get in and out of various insurance lines of business. This could cause an increase in premiums or cancelation of benefits. Companies that have been operating, and continue to operate, in this market have much better control over their costs and thus pay benefits as promised.
Benefits are taxable as ordinary income if premiums are employer paid, therefore income replaced could be as low as 28-40 percent of gross income and unlikely to be able to customize benefits to varying wants and needs. This results in a “no frills” policy including only the most basic benefits. (i.e. Residual, Total Disability, and Cost of Living Riders).
Policy benefits may exclude insured from benefits due to a pre-existing medical condition. Benefits for a specific occupation are often only offered for a 12 or 24-month period. Generally benefits for disabilities caused by mental and nervous disorders are limited to 24 months of benefits.
Personal policies can cost as much as 10 times that of a group plan. Even so, the benefits will be dramatically richer and cover your personal circumstances more appropriately. Additionally, personal policies will vary in price based on disability definitions and riders chosen. Lastly, different companies price coverage for different ages and occupations differently. Note: Riders may incur an additional cost or premium and rider benefits may not be available in all states.
Supplementing a loss of income due to a disability with your personal savings can be just as devastating to your family's finances as a death: If you saved 5 percent of your income each year, a six-month disability could wipe out ten years of savings.
Social Security disability coverage is far from guaranteed: Nearly 69 percent of all applicants are denied benefits when they make their initial claims. 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 2010 was around $2,000 a month (including dependents' benefits) and the average $821. And any benefits you receive are generally subject to federal income tax.
Work with a licensed insurance expert to make sure you are getting the most appropriate and efficient policy for your financial situation. They will help you weight your options and figure out the most sensible plan for you.
Income protection is important because your income is important. Your ability to earn an income is the basis for your standard of living, your financial goals and your retirement savings. Look at it this way: The value of your income is probably reflected in the car you drive and the home where you park it each night.
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.
More expert advice about Health Insurance
Leonard P. Raskin, Registered Representative and Financial Advisor of Park Avenue Securities, LLC (PAS), 954 Ridgebrook Road, Suite 300, Sparks, MD 21152. Securities products/services and advisory services are offered through PAS, a registered broker-dealer and investment advisor, (410)828-5400. Field Representative, The Guardian Life Insurance Company of America (Guardian), New York, New York. PAS is an indirect, wholly-owned subsidiary of Guardian. Raskin Global is not an affiliate or subsidiary of PAS or Guardian. PAS is a member of FINRA, SIPC. 2016-32548 Exp 12/18
Photo Credits: Wheelchairs like Central Park, too © Ed Yourdan - Flickr; Check Man, Cross Man and Jump Man © ioannis kounadeas - Fotolia.com