Protect your finances with disability insurance
crashes. Heart attacks. Random acts of violence. Back injuries. Cancer.
They're all scary things that can change your life in an instant
and dramatically impact your ability to work
Not to worry. You've got sick leave and 12 weeks of short-term
disability from your employer.
But what if the doctor says you need a year of intensive physical
therapy, or you need to enter a clinical trial for experimental treatment, or
you can't go back to your stress-filled job?
That's where long-term disability insurance comes in, to protect
most people's most valuable asset -- the ability to earn an income.
Why bother? Two reasons: Statistically, your chance of being disabled
at age 40 is much higher than your chance of dying. Plus, according to the Department
of Housing and Urban Development, half of all mortgage foreclosures are the
result of a disabling injury or illness.
Yet, the Health Insurance Association of America says that 60
percent of working adults in the country don't have disability insurance.
Many employers offer coverage
The easiest way to get long-term disability insurance is through your employer.
In fact, you may have it and not know it. If you've never looked at the specifics
of your company's disability insurance (DI) benefit, you should do that. It's
important to know what is covered so you can decide if you want to look into
buying additional coverage.
Employer coverage will vary by state and your company's internal
policies. You may find that the long-term coverage is generous and completely
underwritten by the company. If that's the case and you ever have to use it,
that income will be taxable.
One question to ask your benefits manager is whether the long-term
benefit calculation includes government payments? The policy may assume that
you'll qualify for Social Security disability payments or other government benefits
in determining how much it will pay you if you can't work.
That's cause for concern because the Social Security definition
of disability is very strict. According to the HIAA, it only kicks in if your
disability will last more than 12 months or lead to death.
Plus, you only get benefits if you can't perform any job in the
national economy, says Dave Evans, vice president of Retirement and Financial
Planning with the Independent Insurance Agents of America. Not your cushy job
sitting at a computer all day. Any job.
"It's not inexpensive coverage, but it's important,"
Special conditions for wartime
His advice to workers is to read the terms of their coverage carefully, especially
in the wake of the terrorist attacks.
"More than ever, people need to pay attention," he says.
"Almost every policy will exclude someone's activity if they're called
up for military service because the government has a safety net for those situations.
But what happens if I'm a civilian and I'm injured as the result of some action?
Does the policy pay?
"If we're at war with another country and it's black and
white, a lot of policies won't pay. What happens if it's an act of terrorism?
Then it starts to get fuzzy. Most carriers -- life and DI -- say they're going
to pay. In the future, there will be added emphasis on contractual terms."
Here are some basics you need to understand when looking at a
policy, and some things to look out for:
Benefit amount: Disability insurance
is designed to pay you 60 percent of your income -- enough to cover the basics,
but not enough to encourage people to try to beat the system. Many policies
may offer you the ability to add additional insurance as your income increases
over the years.
Term of benefits: Your policy may
specify that for each disabling incident, it will pay benefits for a certain
period. It could be two years, five years, until retirement, or for life. Few
policies will pay for life because it's designed to be a substitute for income
during your working years and they assume that you'll retire someday and start
getting those benefits. You can lower your premium by taking a lower term of
The premium: Like most types of health
and life insurance, the younger you get a policy, the better deal you'll get
on the premium. But there are no simple charts in this category of insurance
like there are for term life insurance. The premium will depend on a wide array
of factors and can vary dramatically from person to person. It will consider
such things as your age, your sex (women pay more for DI because they tend to
live longer, sicklier lives than men), your job (librarian: good; dynamite
handler: bad), your income, your medical history, and your lifestyle, including
the use of tobacco and alcohol.
Non-cancelable: This term means that
once you've been approved, the insurance company can't cancel your policy unless
it decides to stop writing coverage for everyone with your job classification.
It also means they can't ever raise your rates. The best policies will have
Guaranteed renewable: This term means
that you can't be canceled, except if the insurer stops writing your job category.
They can, however, raise the rates for everyone in the category.
Own occupation vs. any occupation:
This is an important distinction that determines at what point you're considered
disabled and can't work. If it's 'own occupation' coverage, you're assumed to
be disabled when you can't perform the functions of your job. With 'any occupation'
coverage, your coverage won't be triggered until a doctor declares you're unable
to work at any job for which you have been reasonably trained. Unless you've
considered a career change from IT manager to motel front desk clerk (hey, they
both use computers), you want a policy that specifies 'own occupation' coverage.
Elimination period: This is a biggie.
In car, homeowners and health insurance, you can save money by assuming more
of the risk yourself and taking a higher deductible. In DI, the equivalent is
the elimination period. This determines when you start receiving benefits. No
policy will pay benefits in less than 30 days after you've been declared disabled.
From there, it jumps to 60, 90, and 120 days. The longer the elimination period,
the lower the premium. The decision for you is how long you can go without money
coming in. The first check probably won't arrive until 30 days after the elimination
period starts. For instance, if you have a 30-day elimination period, your benefits
don't start to add up until you've been disabled for a month. You'll get your
first payment a month later, so that's two months without a paycheck.
Residual benefits: Some policies
may offer you 'residual benefits.' That's basically a partial payment if you're
less than 100 percent disabled, but still can't perform all the duties of your
Rehabilitation riders: Evans says
that insurance carriers are doing more these days in the area of benefits for
rehabilitation and job retraining. (It makes sense -- the faster they get you
back on the job, the sooner they can stop paying benefits.) Ask whether the
policy includes a rehabilitation rider.
Beyond these issues, you'll want to see if you're eligible under
any other disability benefits, such as worker's compensation for an on-the-job
injury, veteran's benefits, or Social Security. If you have a claim, it's important
to file it as soon as possible because that starts the clock for the elimination
For detailed information on disability insurance, visit
Insurance Association of America Web site.
Pat Curry is a contributing editor based
-- Posted: Sept. 23, 2003