If you are like most people, disability insurance is not very high on your list when it comes to coverage you should have. Most workers take the standard (free or subsidized) disability insurance offered by their employer and if none is available, they simply forgo it. This is strange because the risk of disability is far higher than the risk of death. In fact, the Society of Actuaries found that one worker in ten becomes permanently and totally disabled before retirement and that one worker in three becomes disabled for at least 90 days.
Disability insurance subsidizes your loss of income in the case of serious injury or illness. Or said another way, it will replace a portion of your lost income when injury, chronic illness, or other disability forces you to leave the workforce. Disability policies provide either short-term or long-term coverage. Short-term policies may provide up to two years of coverage, although these policies typically cover a much shorter period, perhaps 13 to 26 weeks. Short term disability (STD) is the one normally offered for by many employers. However for more complete coverage you should get some level of long-term insurance, which may extend throughout the policyholder’s working life, often until he or she reaches age 65. At that age (or before, in some cases), the policyholder can usually qualify for medicare and social security.
Here are some useful tips when it comes to purchasing disability insurance. Hopefully they’ll help you ensure you’re adequately covered and perhaps even save some money along the way.
Best place to purchase: Your employer, thanks to group policies, is probably the best place to purchase disability insurance. Even if you think you get free or subsidized disability insurance, read the fine print because you are probably only getting the cheapest short-time type of insurance as part of your benefits package. Also, if your spouse works, compare who gets the cheaper insurance and go with the more cost effective policy. If you buy a policy through your employer, the downside is that if you leave your job, you could be without disability insurance until you acquire coverage from another employer. To ensure continuos coverage, you may wish to purchase a policy outside of work. Insurance portal sites provide a simple way to get a comparison of quotes from multiple providers in one place.
Buy a policy with after-tax dollars where possible: The reason is simple – benefits paid by a policy purchased with after-tax dollars are not taxable. My employer allowed to me to buy life and disability insurance on a pre-tax basis, which I had thought was a great deal until I read that if you pay for a policy premium with pre-tax dollars, you would owe federal income taxes on those benefits. This makes them worth far less – especially if you are in a higher tax bracket. Because your insurance policy premium is likely to be much less than your potential tax liability of the pay out, getting your life insurance on an after tax basis makes more sense. So if your employers allow you to purchase disability insurance with after-tax dollars – take it. This means you could use 100% of your benefit payment for your living expenses
What to look for in a disability policy : From a recent Vanguard article, here are the main factors to consider when shopping for a policy. The right policy cost and coverage will vary by individual and circumstance, so the perfect policy for one person may be far from suitable for another.
1. Waiting or elimination period: If you become disabled, you won’t begin to receive benefits until the end of the waiting period, which can range from 30 days to two years. More common is a waiting period of 90 to 180 days. The shorter the waiting period, the better, though you’ll probably pay more for a shorter elimination period. Because just about all disability policies carry some elimination period, it’s important to set aside emergency savings to cover your living expenses during the elimination period.
2. Waiver of premium: This means that if you become disabled, the insurance company will waive the policy’s premium payments during your disability. Most policies allow for a waiver of premium. If not, ask for it.
3. Inflation rider: Sometimes an inflation rider is a policy option. The payments under most disability policies rarely keep pace with the rising cost of living. An inflation rider can provide this benefit. It will most likely cost extra, but if you suffer a long-term disability, this provision could prove very valuable.
4. Non-cancelable clause: As long as you pay the premiums, the insurance company may not cancel the policy under any circumstances. Once established, the terms of the contract may not be altered, and the premiums may not be raised. Non-cancelable policies are generally the most expensive option.
5. Renewable: If you buy a policy today, can you renew it? That depends on the policy’s renewal rules. Generally you want guaranteed renewable policies because the insurance company must continually renew coverage over an extended period, which is specified in the contract. No contract modifications can be made, and rates may be raised only for an entire class of policyholders. On the other side of the spectrum are cancelable policies, where the insurance company may terminate coverage for any reason by giving due notice to the policyholder.
Qualifying for Disability Benefits
To receive benefits under a disability insurance policy, you must meet the policy’s definition of disabled. Disability is commonly determined according to two standard definitions: “own occupation” and “any occupation” Under Own occupation, you are considered disabled if you are unable to perform the primary duties of your occupation. Any occupation means that you must be unable to pursue any form of gainful employment. Obviously, an own-occupation policy is more attractive to a policy holder and so is more expensive than any-occupation policies. For higher-income or specialized workers, the extra expense may be worthwhile. Some insurance companies also market a hybrid policy: two years of own-occupation coverage, followed by any-occupation for the remainder of the policy.
One thing to remember is that most insurance companies will insure no more than 60% to 70% of a person’s income. For high-income workers, the limit may be closer to 50%. So while it is better to have some income than nothing at all, disability insurance is never going to provide 100% income insurance. That’s why emergency funds and living below your means must be part of your longer term planning.
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