Disability Insurance
Disability insurance, like life insurance, is used to protect future
earnings - disability insurance will replace your income in the event that
you become physically unable to work. Although it gets less attention than
life insurance, experts agree that disability coverage is at least as
important.
While most people are prepared for the medical costs of severe injury or
sickness (through health insurance), without disability insurance, they are
not prepared for the loss of wages that accompanies such a tragedy. In
general, if you count on your job to pay the rent and buy food, you should
seriously consider disability coverage.
Disability Insurance Policies
Many employers offer disability insurance for their employees; however, the
plans vary greatly, and some may not offer adequate coverage. Furthermore,
any disability payouts from an employer's policy are subject to taxes, while
payouts from individual policies are not. Individual disability coverage is
generally much more expensive than employer disability coverage;
nevertheless, you should review any policies your employer has taken out,
and consider purchasing individual coverage if the policy is insufficient.
Disability insurance comes in two types: short-term and long-term.
Short-term Disability
This coverage replaces a portion of lost salary in
the event the policy owner misses six months or less of work. The coverage
typically begins after all sick leave is exhausted, and replaces close to
100% of wages for the first payouts. If the policy owner remains unable to
work, however, the payments will eventually drop, often to 60% of wages. The
length of coverage and payment percentage varies from plan to plan, but
these numbers are typical.
Long-term Disability
Some experts contend that long-term disability
insurance is the most important insurance you can purchase. This can be
partially attributed to advances in medical care; some diseases and injuries
are now disabling rather than deadly, meaning that the incapacitation can be
lengthy.
Typically, long-term disability insurance can be purchased to replace 50-70%
of salary. Some employers allow employees to purchase extra insurance from
the same company, sometimes raising the total to 80%. Note, however, that
some policies have monthly maximum payouts, which may reduce the actual
percentage of salary the policy owner receives. The "salary" is set at the
time the policy is purchased, and you will likely want to increase the value
of the plan as your compensation increases. Some plans only allow increases
with a physical, some allow increases without a physical for the first few
years of the plan, and some have other rules; check the plan for its
particulars.
Long-term disability policies vary in the length of payout: some policies
will only pay out for 5 or 10 years, some will pay out until age 65. Experts
recommend the latter. Policies also vary in definition of disability (some
contentious categories include mental illness and back injuries) and
exclusionary criteria (pre-existing medical conditions, injuries from
dangerous activities, etc.).
Policies can be 'guaranteed renewable' and 'non-cancelable.' Guaranteed
renewable means the insurance company cannot drop the policy, unless premium
payments are skipped. Non-cancelable means the insurance company can never
raise the premium on the policy. Both are desirable, but non-cancelable is
usually best.
There are a few important policy options (or "riders") that should be
considered: "residual benefits" and "cost of living" (COLA). The residual
benefits rider provides the difference between old and new salaries, in the
event that the policy owner can get a new job, but not one with the same
salary as his old one. The cost of living rider allows the policy's value to
increase with inflation.
Finally, a disability policy can be designated as an "own-occupation"
policy. Most policies are "any-occupation," which means the policy owner
must work when he is capable, even if not in the same capacity as before. An
"own-occupation" policy will allow the owner to collect benefits until he
can resume the previous occupation. Typically, these policies are more
beneficial to policy-owners with high-skill or high-paying jobs.
