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Most People Don't Have Enough Disability
Insurance ? Don't Make That Mistake
Disability insurance protects your ability to earn an income.
It provides money to pay your rent, mortgage and all your basic
living expenses if you are injured or sick for an extended
period. It is called disability insurance or disability income
protection but think of it as income replacement when you are
sick or hurt and cannot work. At any age, you are about six
times more likely to be disabled for some period of time than to
die.
Think your employer's coverage is enough? Think again. You
may have whatever sick leave you have coming, and then if an
employer offers short-term disability coverage, it generally
doesn't last more than 12 weeks. There are employers that offer
long-term disability coverage, but if you've never checked the
terms of that coverage, you should.
It never hurts to consult a financial advisor with expertise
in this subject, such as a Certified Financial Planner™
professional.
Basic components of long-term disability coverage:
Monthly benefits. Long-term disability insurance is
generally structured to pay 70 percent of your income up to age
67 or your normal retirement age. See if the policy you're
buying offers you the chance to buy more insurance as your
income increases in future years.
Benefit term. For each disabling incident, your policy
may pay benefits for a certain period — two, five years or until
retirement. It's all in how your policy is constructed. Many
policies may pay for life if you purchase this benefit and you
are disabled prior to age 60.
Buying younger is generally cheaper. Like health and
life insurance, the younger you buy, the less you'll pay.
Occupation enters into the picture because high-risk jobs (where
disability is a greater work-related factor) tend to draw more
claims. Like health insurance, it will consider your medical
history and your lifestyle, including your weight, pre-existing
conditions and whether you smoke.
Premium cost. The premium will depend on a wide array
of factors and can vary dramatically from person to person. Such
things as your age and your gender (women pay more for
disability insurance because they tend to live longer and may
work longer) will be considered.
Non-cancellation provisions. Make sure that once
you're approved, the insurer can't cut your coverage unless it
decides to stop writing coverage for everyone in your job class.
It should also state that the insurer can't raise your rates.
Guaranteed renewable. Like the category above, it
means you can't be canceled, except if the insurer stops writing
insurance for your job category. The insurer can, however, raise
the rates for everyone in the category.
Own occupation vs. any occupation. If you have
"own occupation" coverage, it is intended to go into
effect if you can't perform the functions of the job you're now
in. "Any occupation" coverage pays only if you can't
work at any job where you've been reasonably trained to do the
tasks. For example, if you're working a desk job, you could
easily be transferred to a receptionist's job or some other
function within the company that you can now do or is your
former position. That could significantly interfere with your
recovery time, so consider the benefits of "own
occupation" coverage.
Elimination period. Like a deductible in home, health
or car insurance, the elimination period is a big cost
determinant in disability coverage. Most policies will kick in
after 30 days after you've been declared disabled. But if you
specify an elimination period of 60, 90 or 120 days, your
premium will be lower. An important point about the 30-day
elimination period: the benefits don't start accumulating until
you've been laid up a month after the ruling date and you won't
get your payment until a month after that. Be very clear with
your insurer when you'll get your first check based on what
elimination period you choose, and funnel the money you'll need
in the meantime to your emergency fund.
Partial payments/Residual benefits. Some policies may
offer you "residual benefits" or a partial payment if you're
less than 100 percent disabled, but still can't perform all the
duties of your job.
If you're thinking about self-employment. You'll
likely need disability coverage. But the time to buy is while
you're still in your current job. Why? Because you won't be able
to prove your income once self-employed, so consider obtaining
your desired coverage as you can before you leave.
March 2008 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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