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The Importance of Having Separate
Disability Coverage
If you've never taken notice of disability coverage before,
it's time to start.
Disability insurance protects your ability to earn an income.
It provides money to pay your rent, mortgage and 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 become 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. Depending on your income, long-term
disability insurance is generally structured to pay 50 to 70
percent of your income up to age 67 or your normal retirement
age. Research 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 or five years, or
until retirement. It's all about how your policy is constructed.
Some policies even 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, the company will consider your medical history
and your lifestyle, including your weight, pre-existing
conditions and whether or not 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, this
means your insurance can't be canceled. 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 your current job. "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 and specify "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 start
paying 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.
Thinking about self-employment? If so, you'll
likely need disability coverage. But the time to buy is while
you're still in your current job. Why? You won't be able to
prove your income once self-employed, so consider obtaining your
desired coverage before you leave.
December 2009 — 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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