Disability Insurance

The most important financial asset you possess is your ability to generate income. You most likely assume it's the assets you own, such as your home or your personal property, but that is simply not the case. It is also likely that the financial assets you own, both real and personal, are insured in case of loss but what about your personal earning ability and future income stream, are they insured as well?  What would happen if you lost the ability to earn a living or produce a paycheck?  The odds of not being able to generate income for a period of 3 months or more are almost equal to that of your dying unexpectedly.  Do you have a policy of life insurance to protect your loved ones?   If you do you should also take protective measures to insure both yourself and your loved ones in the event you suffer an accident or illness which prevents you from working.  Accidents and medical problems are seldom foreseeable or predictable and it is surprising to note that almost a full third of all disabilities are incurred by those under the age of 45. 

A short term disability is typically thought of as lasting 26 weeks or less and a long term disability anything beyond 26 weeks.  Similar to a policy life insurance, you'll want to protect 60-70% of your current gross income with disability coverage.  Look at your monthly budget and determine what expenses you would need to cover if you were unable to work for a period extending for months or years.  In addition to the usual expenses, in case of disability you may also have medical related expenses to cover.  Your goal with disability insurance should be to maximize your coverage without paying for benefits you don't truly need. 

When comparing and selecting amongst various policies of disability insurance, the following definitions or parameters of coverage should be taken into account:

Own occupation – this provision states that you can collect on the policy if you cannot perform the requirements of your own occupation or the occupation you were working in prior to the disability.  Insurance companies are more likely to have to pay out on a claim with this type of coverage therefore it is riskier to the insurer and may cost more for this type of coverage.

Any occupation – this is when you are unable to perform any work-related duties and cannot function in any work environment.  This type of disability must typically be permanent in nature and is used to determine benefits provided under Social Security.  It is also the disability least likely to occur.

Modified any occupation – this applies if you are unable to work in an occupation which you were trained or educated for.

Split definition – for the first two years following the disability the definition applied for coverage is “own occupation” and then at the end of that period coverage transitions into “any occupation” coverage.

Income loss definition – under this provision a comparison is made between pre and post disability income and the ability to function or perform in the workplace is not the critical factor here.

Other Benefit Considerations:

Monthly benefit payment – ideally your disability policy should replace your income to match your pre-disability level.  However most of the policies limit your coverage to 60-70% of your income.  It is also important to note that these benefits are taxable to you when your disability coverage is provided by your employer.

Monthly benefit period – typically you are eligible to collect on a policy until age 65 though each policy will vary according to the cause and magnitude of the disability.

Elimination periods – insurance companies want to avoid insuring those who have applied for a policy knowing that a disability is on the horizon, therefore the insurance companies have elimination periods (or waiting periods) before the policy becomes effective.  A typical elimination period is 6 months to 3 years and the longer the elimination period you are willing to agree to (thereby reducing the risk to the insurance company) the lower the overall premiums on the policy will be.

Renewal provisions – a policy can be non-cancelable, guaranteed renewable and conditionally renewable.  With a non-cancelable policy the premium is guaranteed and the right to renew for a specified number of years is as well.  With a guaranteed renewable policy, your policy can be renewed under its current terms but the premium may be adjusted.  Under a conditionally renewable policy, the policy may be renewed at the option of the insurer and the terms and conditions are typically outlined in the insurance contract or policy documents as to what could constitute justification for non-renewal.

Premium waivers – in the event you become disabled and then begin to collect on your disability policy, you are not released from the responsibility of making payments on your disability insurance premiums unless your policy includes a premium waiver.  These waivers are inexpensive to add onto your policy and could prove to be quite costly to you in the long run if you don't ask for it.

Quick Tips on Disability Insurance:

  • Take care of your physical health as well as the health of your credit.  Today your credit rating can impact almost any area of your financial life and insurance is no exception.  Getting fit and remaining in good health should be a top life-style priority as there are a multitude of benefits:  physical, psychological and financial.
  • Stay away from policies that pay out only if you are completely disabled.  The best option is to obtain a policy that covers you if you cannot perform or work with in your “own occupation” as this coverage will offer you broader protection.
  • Get a policy with as long an elimination period as you feel comfortable.  You can save substantially on your premiums if you can hold out as long as possible before having to tap your disability claim.  Everyone should have a minimum of 6 to 8 months reserves to cover their monthly expenses in the event of an unexpected emergency.
  • Verify that your policy is non-cancelable, subject only to your payment of premiums of course, if you are able to get a guaranteed premium as well then even better.  You also want to be certain to obtain the premium waiver even if there is an increase in the premiums for this option because the last thing you want is to have to continue making the premium payments on your disability policy when you are collecting on the very policy at the same time. 
  • Apply for a policy as soon as possible.  Just as with life insurance, age works against you.  The greater your age, as well as the more dangerous the type of work you do, the higher the risk to the insurer and therefore the higher your premiums will be.
  • Check your social security benefits to determine what would be available to you as well.   Social security provides “any occupation” protection in the event of a disability but it is very restrictive and usually requires a complete disability. 
  • Do your homework and shop carefully.  Just as with any other type of insurance you want to check around and compare rates as well the financial strength and stability of the various insurance companies before signing up with one.

Nancy Osborne, Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.

"I am addicted to Bloomberg TV" says Nancy.

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