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Protect your finances with disability insurance

Car 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.

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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," Evans says.

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 benefits.

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 this.

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 job.

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 period.

For detailed information on disability insurance, visit the Health Insurance Association of America Web site.

Pat Curry is a contributing editor based in Georgia.

-- Posted: Sept. 23, 2003

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