By: Investor Solutions, Inc
Disability policies, like life insurance, come in many varieties. Which type you own will have a dramatic impact on your ability to collect the benefits (and replace income). This article will explore some of the varying characteristics of disability income insurance.
Let’s highlight some key differences starting with what the term “disability” means. From the insured’s point of view, the strictest definition of disability is “any occupation”.
This means the insured is considered disabled only if he is unable to perform the duties relating to ANY job. So, a disabled corporate litigator with an “any occupation” policy will not be able to collect benefits if he can still get hired by McDonald’s to flip burgers. You don’t want to own this type of policy.
A “modified any occupation” policy recognizes a disability only if the insured is unable to perform the duties pertaining to “any gainful occupation for which the insured is reasonably fitted by education, training, and experience”. For example, the litigator won’t be able to collect benefits if he can find gainful employment as a paralegal.
A better policy to own is an “own occupation” policy. This is the most liberal definition from the insured’s point of view. A person is considered disabled if “he or she is unable to engage in the principal duties of his or her own occupation”. So any illness or injury preventing the insured from working in the same exact profession is considered disabling. In the case of the corporate litigator, if the insured is unable prosecute in a courtroom due to a physical impediment, he qualifies for disability benefits. However, there is nothing that would prevent that same litigator from finding gainful employment as an estate planning attorney (that doesn’t litigate) essentially creating two income streams. “Own occ” polices (as they are known) are typically the most expensive option for the insured because they’re a financial risk for the insurance company.
An alternative approach to solving the disability problem is a “loss of income” policy. It successfully addresses the need for income replacement, is more affordable for the insured and is more cost effective for the insurance companies. Most insurers offer a definition of disability based only on a comparison of post disability income and pre disability income. If your average income is lower after your disability, the policy picks up most of the difference. This type of policy eliminates the possibility of profiting from your disability (as in the own occ policy).
Once the term disability is defined, the second most important feature to consider is the waiting period from the point of disability to the time benefits are paid. This time gap is known as the elimination period.
Individual policies usually offer elimination periods of 30, 60, 90, 180 or 365 days. The longer the elimination period, the less the premium. So, if you don’t have short term disability coverage (which we’ll discuss next), you better be sure that you’ve stored three to six months of expenses away in a savings account to cover the time gap.
Duration of Benefits
Disability benefits can be short term or long term. Short term policies usually cover the first 90 days of an injury or illness, with benefits payable immediately. Short term policies are usually capped at no more than two years worth of benefits.
Long term disability usually doesn’t usually kick in until after 90 days or 6 months, depending on the policy. The maximum benefit period varies depending on the type of disability. The most popular choice for a disability insurance policy is “To Age 65”. That means that if you become permanently disabled, your last benefit check is on your 65th birthday. A policy providing a lifetime benefit period will be more expensive, but often it is not much more expensive than the to age 65 policy. For those of you looking to save premium dollars on your disability insurance, a five year benefit period will cover the average length of disability which is about 3.2 years.
As with life insurance polices, an individual may purchase additional policy riders at additional costs. Some examples include, guaranteed insurability option, cost of living riders, and long term care conversion riders.
Benefits payable under group long term disability plan may be reduced by other sources of disability income such as Social Security, workers compensation, or disability benefits received from other employer-sponsored plans. It may, in fact, leave some employees without any group benefits at all forcing them to rely solely on a meager social security income stream.
Shopping for Providers
Assuming you’ve determined what benefits are appropriate for you and recognizing what features to look for in a policy, the final step is to choose an insurance company. Factors to consider are the firms’ financial condition (are they economically viable), areas of specialty (do they cater to a specific profession), product offering, underwriting philosophy (are they too aggressive in declining business), claims history (are the quick to pay or do they drag their feet), etc. Sites like http://www.quotes.com , http://www.disabilityincome.com and http://www.quotesmith.com may be good places to begin your search.
To recap this and my previous article, the most important things you need to consider regarding disability policies are:
- Not owning disability insurance is a recipe for disaster
- Employer sponsored disability policies may not protect 100% of income
- Employer sponsored policies are not portable if you leave the company
- Be sure to appropriately define the term “disability” in your policy
- Determine an appropriate elimination period and ensure your savings covers the time gap
- Define the period benefits are payable
Remember, your biggest asset is your future income. Your retirement, not to mention your survival depends on your ability to produce. It’s never fun to plan for bad outcomes, but the consequence of failing to plan is even worse!