Insuring Against Loss Of Income

What would you and your family do for income if you were disabled and unable to work as a result of an accident or illness?

Disability income insurance, which complements health insurance, can replace lost income. At age 40, the average worker faces a 14 percent chance of dying before age 65 but a 21 percent chance of being disabled for 90 days or more.

There are three basic ways to replace income:

1. Employer-Paid Disability Insurance
This is required in most states. Most employers provide some short-term sick leave. Many larger employers provide long-term disability coverage as well, with benefits of up to 60 percent of salary lasting from five years to age 65, and in some cases extended for life.

2. Social Security Disability Benefits
This can be paid to workers whose disability is

  1. expected to last at least 12 months and
  2. so severe that no gainful employment can be performed.

3. Individual Disability Income Insurance Policies
Other limited replacement income is available for workers under some circumstances from workers’ compensation (if the injury or illness is job-related), automobile insurance (if disability results from an auto accident) and the Department of Veterans Affairs.

For most workers, even those with some employer-paid coverage, an individual disability income policy is the best way to ensure adequate income in the event of disability. When you buy a private disability income policy, you can expect to replace from 50 to 70 percent of income. Insurers won’t replace all your income because they want you to have an incentive to return to work. However, when you pay the premiums yourself, disability benefits are not taxed. (Benefits from employer-paid policies are subject to income tax.)

Key features to look for as you shop for disability insurance:

  • The DEFINITION OF DISABILITY. Some policies pay benefits if you are unable to perform the customary duties of your own occupation. Others pay only if you are unable to perform any job suitable for your education and experience. Some policies define disability in terms of your own occupation for an initial period of two or three years and then continue to pay benefits only if you are unable to perform any occupation. "Own occupation" policies are more desirable, but more expensive.
  • A POLICY THAT WILL REPLACE FROM 60 PERCENT TO 70 PERCENT OF YOUR TOTAL TAXABLE EARNINGS. A higher replacement percentage, if available, is more expensive. Evaluate your other sources of income before you decide how much disability coverage you need.
  • COVERAGE FOR DISABILITY RESULTING FROM EITHER ACCIDENTAL INJURY OR ILLNESS. An accident-only policy is less expensive but does not provide adequate protection. Ideally, both accident and illness coverage should be purchased.
  • A COST-OF-LIVING INCREASE IN BENEFITS. You are buying a policy today that may not pay benefits for a decade or more. Should you need those benefits, you will want them to have kept pace with increases in the cost of living. (Some companies also offer "indexed" benefits, keeping pace with inflation after benefit payments begin.)
  • A POLICY PAYING "RESIDUAL" OR PARTIAL BENEFITS is available, so that you can work part-time and still receive a benefit making up for lost income. A standard feature in some policies, and added by a rider to others, residual benefit pays partial benefits based on loss of income without an initial period of total disability.
  • TRANSITION" benefits, offered by some companies, can offset financial loss during a post-disability period of rebuilding a business or professional practice.
  • ONGOING COVERAGE. A non-cancelable policy will continue in force as long as the premiums are paid; neither the benefit nor the premium can change. A guaranteed renewable policy keeps the same benefits but may cost more over time since the insurer can increase the premium if it is increased for an entire class of policyholders.
  • The FINANCIAL STABILITY of the insurance company is vital when purchasing benefits you may not use for many years to come. It is most important to find out the financial ratings of an insurer. Your insurance agent or company representative will provide this. 

Two ways to keep costs down:

  1. Electing a LONGER WAITING PERIOD before benefits begin. If you have enough resources to cover expenses during the first three months of disability, your premiums will be lower than with coverage that starts after 30 days.
  2. Electing a SHORTER BENEFIT PERIOD, with benefits payable to age 65 -- the age at which you would normally retire -- instead of for a lifetime. However choosing a benefit period of two to five years, ending before normal retirement age, could be penny-wise and pound foolish. You might save money on premiums, but you could be without coverage when you need it most. It is disability of long duration that poses the greatest financial hardship.

 
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