Options and critical considerations for disability insurance

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Nobody likes to think about what life would look like should disability strike. But the reality is one third of all Americans between the ages 35 and 65 will become disabled for more than 90 days. One in seven workers will be disabled for more than five years.

While many people think that disabilities are typically caused by accidents, the majority of long-term absences are actually due to illnesses, such as cancer and heart disease. The loss of income can be so devastating that it forces some people to foreclose on their home or even declare bankruptcy.

Disability insurance replaces a portion of your income if you become disabled and are no longer able to work. A typical group plan offered by an employer will replace up to 60% of your salary. Supplemental plans and individual policies will often cover up to 70% or 80%. (No plan will cover all of your salary for fear you will have little or no incentive to get back to work.) Benefits typically last for a set number of years (say five years) or until you reach retirement age. (Benefits typically stop around retirement age since once you retire, you would no longer be dependent on the income you generated by working, anyway.)

If you pay the premium out-of-pocket meaning your employer doesn't cover the tab benefits are tax free. Long term disability policies vary greatly. Typically, the cheaper plans have very strict definitions of disability, making it difficult to claim benefits over many years.This is also true of some group plans.

Individual Long Term Disability Insurance
If you are self-employed or not covered by your employer, it clearly makes sense to consider purchasing an individual plan. But even if you are covered at work you may want to consider supplementing what you've got: After all, you probably can't afford to live on just 60% of your salary. An individual plan will allow you to insure another 10% to 20% of your income. In some cases, you may even be able to get individual coverage for a six-figure salary and a bonus something you'll never get with a group plan.

Individual disability insurance is a simple concept. It is an insurance product designed to replace anywhere from 45 to 60% of your gross income on a tax-free basis should a sickness or illness prevent you from earning an income in your occupation. Every disability insurance policy from every insurance company is very different so it is NOT adivisable to simply shop for the most competitive rate.

Many people have a disability plan through our employers but most company-issued disability insurance programs only provide you with 60% of your salary and sets a monthly maximum of $5,000 to $10,000, which can be even less than 60% of a highly compensated employee's salary. You're actually getting a lot less than 60% of what you're used to. Details like this make it clear that everyone should be mindful of their company-sponsored programs while looking for any opportunities that may be better.

Getting an extra 10% of coverage through an individual long term disability insurance policy brought peace of mind. People should consider opting out of their employer plan and purchasing a more comprehensive individual policy on their own. Why spend the extra money? An individual policy stays with you when you switch jobs and you can sue if the insurance company denies or delays benefits. With a group plan you'll have to go through a lengthy arbitration process. And unlike group policies, the amount that you receive is also not offset by any other benefits, such as Social Security, that you may receive.

Many of us have never had a major medical problem but the truth is that about 30 percent of Americans age 35 to 65 will suffer a disability lasting at least 90 days sometime during their careers. Should you ever need the protection a disability policy can offer you'll be glad you took financial precautions now. Without coverage, an unexpected disability can easily drive you into serious debt if not bankruptcy.

Government Safety Net
Social Security is only available to those with a condition that is either expected to leave them unable to work for at least a year, or is terminal. For those who do qualify—around 36% on average on the first application, though more win benefits after appealing—the payout averages just 40% of their predisability income. For high earners, their share will be smaller.

Qualified applicants should count on waiting three to five months or longer to get Social Security disability benefits. And with the number of applicants growing, if you're depending on that benefit, you've got problems. Consumers should also check if theirs is one of the few states that provide some additional disability benefits.

In figuring out your likely expenses during a period of disability, keep in mind that if you are out of work for an extended period, you may lose your job, and have to start paying for health coverage. Though disabled people who receive Social Security benefits can qualify for Medicare, there is a two-year lag before the federal health coverage kicks in.

The Complete Guide to Social Security Disability Benefits

Buying a Policy

Unfortunately, buying an individual plan can be tricky and expensive. Just like life insurance, prices will vary based on a host of factors including one's age, gender, amount of coverage and health status. Even one's occupation can raise your premiums and we aren't talking about people who jump out of airplanes for a living. Doctors and lawyers can expect to pay a premium since their job skills are so specific versus, say, a general business manager.

Disability-insurance benefits from the workplace and the government are getting harder to come by—and that's putting more pressure on consumers to purchase their own coverage in case a medical condition keeps them from working. But disability insurance can be confusing. Policies may include conditions that make it tough for people filing claims to actually qualify for the benefits. And some policies may limit payouts for certain diagnoses, particularly mental illness. To protect themselves, consumers considering buying disability coverage need to read the fine print.

The percentage of companies that paid all or part of the cost of workers' private long-term disability insurance fell to 48% last year, from 59% in 2002. Many employers are taking a step back in terms of what they pay and putting the onus on employees to purchase richer benefits if they choose.

When considering a disability policy you will want to ensure that it is renewable. There are three options:

1. A non-cancelable and guaranteed renewable policy
2. A guaranteed renewable policy
3. A conditionally renewable policy

While the price for a non-cancelable policy can be a little steep it by far the best option as it locks in your rates and benefits. The insurance company can not make changes unless you request them.

A guaranteed renewable policy is the second best choice. After you enter in to this type of policy, your insurer doesn't have the right to drop you, but they reserve the right to raise prices for specific reasons such as making a claim or reporting an injury that could increase the odds of making a long-term claim.

The least preferable choice is conditional renewable policy. If possible, avoid conditionally renewable policies as the insurer can put any conditions on your policy or raise rates at any time for any reason.

An important thing to look for when considering disability insurance policies is the definition of total disability.

The most consumer-friendly definition of total disability is "own-occupation disability."

If you are disabled and cannot perform the principal duties of the job you currently have, you get paid your disability benefit even if you can do some other tasks. This definition is extremely important as it means you will not be penalized for working if you can't yet go back to your full-time job.

For example, if you can not go back to your shipping job due to a back injury that limits the amount you can lift, you could work as a salesperson during this claim. The inverse of this definition is "any-occupation disability." Under this definition you do not get a benefit unless you are completely unemployed and unable to do any work.

When looking at a new disability policy ensure that it also includes partial or residual coverage.

Be sure to get coverage until retirement age, although this could add another 15% to the premium. The most comprehensive policies also include a cost-of-living adjustment," which will add at least 20% to the premium, and a future purchase option" for another 25%, which allows consumers to increase their coverage as they earn more money without having to take another physical.

On average, 1/3 of all claims is for partial disability insurance coverage. Insurers only pay partial disability benefits if you can work at your job for a reduced period of time. For example, after an accident, someone might leave work entirely for six months, then work on a reduced schedule for the next year in order to be reintegrated into their position. If working part-time meant the person lost a percentage of his income, partial disability coverage would kick in and pay a proportionate benefit.

Other considerations:
If it's a percentage of your income, does that include just your base salary, or other things like commissions?
Portability: If it's being purchased through your employer, can you keep it if you leave?
What triggers the benefit: Do you have to be unable to do any job comparable to your own?
Limits on payouts: For long-term policies, are benefits for certain conditions, like mental illness, capped?

Here are some online sources of information:

Social Security Administration: www.socialsecurity.gov/pubs/10029.html
Council for Disability Awareness: www.disabilitycanhappen.org
Consumer Federation of America: www.consumerfed.org

If you have disability coverage, you may not use it for decades and hopefully you never will. However, you may find a use need to use it in 15 years from now.

Due to economic factors and inflation, the policy benefits you have now may pay for considerably less than it does now. A smart person will buy a rider that adjusts your policy for inflation, particularly if you're in your younger.

Another option to consider is a " future purchase option". It allows you to buy more coverage as your salary rises or your business expands. This too is especially good for people just starting their careers.

As I am sure you can see, disability insurance is a good option regardless of what profession you are in. We just never know when we might fall at work, twist our back, slip in the shower or loose an appendage.

Any injury, no matter how small it seems now, has the potential to have serious complications later in life. If you do not have a suitable disability insurance program in place you may find yourself having to face being unable to work and only receiving 40% of the pay you are used to.

The small price of 1 to 3% of your yearly income is a small price to pay for the security that is offered with a good disability insurance policy.

Prepare for your future and protect your loved ones. If you were suddenly unable to work due to an accident what would you do?

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