Article
Financially speaking, your biggest asset is your ability to earn an income. Your income enables you to pay for your everyday living costs. It is from earnings too, that many people save for retirement—funding your retirement by saving from income you earn today. Have you ever considered the following questions: “What would happen if I became too sick or too injured to work? What would happen if my husband or wife, who is the primary breadwinner, became too sick or too injured to work?” How to prepare for such an emergency?
When you are unable to work, disability insurance can replace a portion of your income. If you depend upon your income (or have people who depend upon your income), you need disability insurance. Become informed about disability insurance before you ever need to have it.
Who becomes disabled?
The following sobering statistics are provided by Low Load Insurance Services, the advisor’s insurance advisor:
- 3,000 Americans become disabled every hour
- A 30-year-old is 4 times more likely to become disabled than to die before age 65
- Most disabilities (almost 90%) are due to illness and not injury
- 95% of disabilities are not work-related
What do I need to know about the different types of disability insurance?
It is important to understand the differences between group long-term disability insurance and individual long-term disability insurance. If you are employed, there is a good chance your employer offers group long-term disability insurance. Often the group disability coverage is 60% of your base salary with a capped monthly maximum. The employer may pay the premium as an employee benefit. Should you become disabled, your disability benefit would come to you as taxable income, lowering your benefit at a time when you may need every penny. (Note: An employer-sponsored long-term disability insurance coverage is often not portable, meaning if you leave your job you do not take the disability coverage with you.)
Group disability insurance coverage can be less expensive than individual disability coverage. Many people consider individual disability coverage as a supplement to their group disability coverage if the group disability benefit is not sufficient.
Individual long-term disability insurance policies can insure beyond the group maximum, up to 100% if a catastrophic rider is included on the policy. Individual disability policies can include protection for not only income, but also for bonuses and commissions. With an individual disability policy, you may pay the premiums with pre-tax dollars, so your disability income benefits come to you tax-free.
MyLTDbenefits.com, an online website with a team of disability experts, does a good job of explaining the important distinctions in the definition of occupations in disability policies; “Disability Insurance covers you and your income and the polices vary in their type of occupation by definition. Disability claims generally fall into two broad categories: own occupation and any occupation. An “own occupation policy” typically requires that the insured be unable to perform the material and substantial duties of his or her occupation to be considered “totally disabled. The disability need not render the claimant totally helpless; rather the claimant must be rendered unable to perform the material and substantial duties of his or her occupation. Other policies, sometimes referred to as a general disability policy, create an “any occupation” standard to qualify for disability benefits. These policies typically define disability in terms of the insured’s inability to engage in any gainful occupation that the insured is reasonably suited for based on his or her education, work experience, and other individualized factors.”
What matters most when making this decision?
Understanding how much disability insurance you would need to continue your lifestyle or “standard of living” if you become disabled if the first question to answer. As a rule of thumb, it is good to protect 60-80% of your after-tax income. Once you decide how much, then you should choose a reputable insurance agent who specializes in disability insurance and can provide several quotes from different insurance carriers. The Consumer Affairs website www.consumeraffairs.com/insurance/dis.htm lists the top ten rated disability insurance providers.
After you derive at the amount of insurance you need, do your homework! When reviewing a disability policy, know what questions to ask. Some questions to ask include: What is the monthly benefit level? What is the benefit period? What is the elimination period? Is this policy guaranteed renewable? Is the policy non-cancelable? Is there inflation protection? Are there exclusions?
Next, partner with someone—an insurance agent, a financial advisor, or even your human resources department to understand what income replacement or disability insurance you have, how much you need, and what are the best avenue to obtain this loss of income coverage. This person should listen to your goals, answer any questions, and guide you in the right direction.
Any disability insurance protection is better than no disability insurance protection. Ask yourself, “What would happen if I became too sick or too injured to work”? And remember, that financially speaking, your biggest asset is your ability to earn an income.
