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Ask any financial planner or agent what risk could be termed the forgotten risk and chances
are the answer will be disability. Their clients often come in the door questioning whether they have enough, too much or
the right kind of life insurance, but rarely have they thought about how they could survive financially with no earned income.
In reality, disability insurance is as important as (and in some cases, even more important
than) life insurance. Go to above link for full article.
What is disability insurance?
Disability insurance is insurance that's designed to protect your income and thus your
standard of living. If you become disabled, you probably won't be able to earn much income but you will continue to have living
expenses. Your monthly outlays could even rise, especially if you need paid help at home, can no longer drive, or have to
pay for prescriptions or therapy that arent completely reimbursed by your medical coverage. Disability insurance will provide
monthly payments to help you meet your daily living expenses.
Who needs disability insurance?
Most people need to have some sort of disability insurance, which will provide them with
money in case they can no longer work. When people without disability insurance become disabled, their income stops and their
life savings are drained shortly thereafter.
There are, of course, some exceptions to this rule. For example, if you're married and
both of you work, one of you may be able to skip disability coverage if the family could maintain its present lifestyle on
the others paycheck.
You probably don't need disability insurance if you are a full-time homemaker or student,
either.
Why do I need disability insurance? Doesn't my employer have to keep
paying me if I get hurt while NOT on the job?
Through workers compensation, employers must usually continue paying a worker who gets
hurt on the job, but most don't have to pay anything if the injury or illness was incurred outside the workplace.
According to "Get a Financial Life" (Simon & Schuster), in 1996 "only Puerto Rico
and five states-California, Hawaii, New Jersey, New York and Rhode Island-require employers to provide income to disabled
employees who get hurt off the job. And federal disability benefits from Social Security are extremely difficult to get; the
majority of people who apply are rejected."
As a result, you should seriously consider purchasing private "disability insurance" that
will pay you if you are too sick or injured to work, regardless of whether the illness or injury is job-related.
What's the difference between worker's compensation and disability insurance?
According to "Get a Financial Life" (Simon & Schuster Inc., New York), " "'Worker's
comp,' as it is known, protects you if you are injured while performing your job. Disability insurance covers you for any
injury or illness, whether it happens at home, on vacation or on the job. If you're lucky enough to work for an
employer who provides you with disability insurance,
you should assess exactly how much you're protected."
For example, if your employer provides coverage that will pay you for only 30 days
if you are unable to work, you might want to buy a supplemental policy that will pay after the first 30 days have passed.
Do I need to buy disability insurance if my employer has a Section 105 contribution plan?
If you work and become disabled, you may be able to collect some or all of your regular
salary if your employer provides a Section 105 plan.
A Section 105 plan is a "salary-continuation" program. Under such a program, the employer
continues making regular wage payments -- in part or in full -- to an employee who becomes disabled and can no longer work.
If your employer provides such coverage, you may not need to purchase disability insurance
of your own. Or you might choose to purchase an additional policy for a relatively low cost that supplements the coverage
provided by your employers plan.
Do I need disability insurance coverage even though I'm single?
Just about everyone needs disability insurance that will help pay their bills if they
are injured or become too sick to work. Single people are especially vulnerable. According to "The New Century Family
Money Book" (Dell Publishing), "Singles do not have the luxury of falling back on a spouses income in the event of an under
- or uninsured disability. Therefore, maintaining sufficient disability insurance is particularly crucial."
Most married couples also need disability insurance coverage, unless both spouses earn
a relatively large amount of money and could still "get by" comfortably if one of those incomes suddenly disappeared.
How much disability insurance do I need?
Determining how much disability insurance you need is relatively easy. You need enough
coverage to provide you with sufficient income to live on until you either go back to work or other financial resources (such
as Social Security disability payments) become available.
According to "Personal Finance for Dummie$" (IDG Books Worldwide, Foster City, Calif.),
"If you don't have much saved in the way of financial assets and you would want to continue with the lifestyle supported by
your current income, get enough disability coverage to replace your entire take-home (after-tax) monthly income.
The benefits you purchase on a disability policy are quoted as dollars per month that
you receive if disabled. So if your job provides you with a $2,000-per-month income after payment of taxes, then you ask for
a policy that provides a $2,000-per-month benefit."
In addition to the monthly coverage amount, you also need to select the length of
time you want to be able to collect benefits. You need a policy that will pay benefits until an age at which you become financially
self-sufficient. For most people, thats around 65.
Should I own group or individual disability policies?
It's usually much cheaper to purchase disability insurance through your employer or other
group plan than on your own. Group plans cover dozens, hundreds or even thousands of people, which allows the insurer to spread
its risk around and charge lower premiums.
If you shop for coverage on your own, be careful. According to "Personal Finance for Dummie$"
(IDG Books Worldwide Inc., Foster City, Calif.), "Don't trust an insurance agent to be honest about the quality of a disability
policy your employer or other group is offering. Agents have a huge conflict of interest when they criticize these options
because the group insurance cuts them out of the picture.
If you opt to purchase disability insurance through a local agent, tread carefully. Some
agents try to load down a policy with all sorts of extra bells and whistles to pump up the premium and their own commission."
The book also suggests checking with three particular insurers for competitively priced
policies. They are Wholesale Insurance Network (800-808-5810), USAA (800-531-8000)
and Jack White & Co.s Insurance
Services (800-622-3699).
Can I be covered by more than one disability policy?
As with life insurance, you can buy more than one disability insurance policy.
In fact, it sometimes makes sense to purchase more than one disability policy. For example, you may want to purchase
two policies that cover different disability situations. Or, you might be able to save money if you buy one policy
that will provide benefits for only a few months with no waiting period, and a separate policy that will provide long-term
benefits only after you have been disabled for a certain
length of time.
What features should I look for in disability insurance?
Here is some advice about the key areas to examine, from "Personal Finance Dummie$"
(IDG Books Worldwide Inc., Foster City, Calif.):
1. Definition of disability. An own-occupation disability policy provides benefit
payments if you cannot perform the work you normally do. Others pay only if you are unable to do work for which your are "reasonably
trained."
2. Noncancellable and guaranteed renewable. These features guarantee that
your policy cant be canceled because of poor health. If you buy a policy that requires periodic physical exams, you can lose
your coverage just when you are most likely to need it.
3. Insurers financial stability. It's generally best to stick with companies that get
top ratings from independent rating firms, although your state or another insurer may come to the rescue if your own insurer
can't pay.
4. Waiting period. This is the lag time between the time a disability is incurred and
the time payments start being made. The shorter the waiting period, the higher the premium.
5. Residual benefits. This option pays a partial benefit if you have a disability that
prevents you from working full-time.
6. Cost-of-living adjustments. They help the benefit payment keep pace with inflation.
7. Future insurability. It allows you to buy additional coverage, regardless of your health.
This option costs extra, and most people don't need it.
What is the maximum benefit I can receive if I own one or more disability policies?
Usually, the maximum income you can protect by disability income insurance is 65% to 70%
of your gross earned income. Companies make every effort to avoid a benefit that is greater than the after tax income of the
insured.
What are the residual benefits of a disability insurance policy?
A residual disability insurance policy provides disability payments to you if are working
but suffer an income loss as a result of your inability to work full-time or your inability to perform all the duties that
you routinely performed prior to your disability. (This could be beneficial to someone with HD downgrading their position,
but continuing to work.)
According to "Wealth Enhancement & Preservation" (The Institute Inc., Denver), "Generally,
residual benefits are payable when your income loss is 20% or more and you are under the care of a physician. The amount of
benefits that you receive is in direct proportion to your income loss.
For example, you return to work but are earning 40% less than before your disability.
In this case, you would be eligible to receive 40% of your disability benefits. Most residual disability plans provide a minimum
benefit of 50% of covered compensation."
Its important to note that some policies define residual disability simply as a loss of
income, while others require a loss of income and a loss of time or duties. Other contracts combine these elements, requiring
a loss of time or duties during the elimination period only.
What is meant by the waiting period in a disability policy?
Many disability insurance policies have a waiting period that requires a certain number
of days to pass before the disability payments start flowing. Usually it is 60 to 90 days. A few have no waiting period
at all, while some have periods as long as two or three years.
If you're paying for the policy yourself-rather than the company buying it for you-you
will probably get to pick the length of time you want the waiting period to last. The shorter the waiting period, the higher
your premiums.
How does the definition of disability affect my benefits?
There are different definitions of disability which you should understand if you're looking
for a disability insurance policy. The definition used in your particular policy will determine the circumstances under which
you will be able to collect payments, and possibly even decide whether you can go into some other line of work without losing
your disability benefits.
Under the own occupation definition of disability, total disability benefits are payable
if you become unable to work at your specific job or career. But if you go out and start a new career or get into a new line
of work, you may be able to collect both a paycheck and disability payments.
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How does the definition of disability affect my benefits? continued
With the modified own occupation definition, benefits are payable to you if you
are unable to perform the duties of your occupation and do not work in another occupation. The decision to work in another
occupation is made by you, not the insurance carrier.
Finally, some policies will pay you only if you are unable to perform a job for which
your are reasonably trained. These policies tend to have the lowest premiums because payments will kick in only under
limited circumstances.
Where can I buy disability insurance?
Several companies offer insurance that will pay you if you become disabled or too sick
to work. If you're single, you probably should purchase a disability policy because you don't have a spouse to support you
if you cannot work. Many married people need coverage too, especially if one spouse doesn't earn enough to support the family
if the other becomes incapacitated.
Check with your insurance agent. Your employer may offer a disability plan, as do many
trade and credit unions. And most large insurance companies sell disability coverage. Stick to those rated "A-plus" by A.M. Best, the big insurance-rating firm, to ensure that the company will be able to pay your claim
if you ever have to lodge one.
How do I shop for disability coverage?
Disability rates and coverages vary greatly from company to company. Therefore
it is important to shop around. Simply ask for quotes from the agents you know and then call other companies shown in the
Yellow Pages under disability insurance. Most of the large, old-line companies sell disability and are pleased to quote rates.
Will lifetime coverage on my disability insurance policy cost a lot more than coverage to age 65?
No,
it will cost only a little more, 5 to 10%.
What type of financial information does a company need to under-write disability income insurance?
When you apply for disability insurance coverage, don't be surprised when
the insurance company starts asking questions about your income and investments. The company needs this information to verify
your earnings and to help ensure that you have an appropriate amount of coverage.
The insurance company also will ask you to list all the taxable income you receive,
including salary, wages, fees, commissions and draws. You may have to provide documentation, including copies of W-2 forms
and possibly even your entire income tax return.
What medical information does an underwriter use in evaluating my disability income application?
In addition to information concerning your income and investments, a company that agrees
to provide you with disability insurance will also require that you provide it with a fairly detailed accounting of your medical
history.
In addition, you will also probably have to take a physical exam. The exam will include
blood and urine tests, as well as a statement from the attending physician.
Disability claims have been skyrocketing, so your employer or insurance agent will also
be required to submit certain information about you as well.
If I purchase a disability income policy, can I take a tax deduction for the premiums?
If you purchase the policy on your own, the Internal Revenue Service will not allow you
to deduct the annual premiums. However, if you eventually become disabled and begin to collect benefits, the money you receive
from such a policy will not be subject to federal income taxes.
If you purchase disability insurance through your employer, you may be able to have the
premiums deducted from your paycheck on a pre-tax basis through a cafeteria plan. If this option is available, its usually
wise to take it: By using pre-tax dollars, you will lower the earnings your employer will report to the IRS and thus lower
the taxes you must pay, however any benefits you receive will be taxable.
Can disability premiums be deducted from my paycheck and paid with pre-tax dollars?
If you purchase disability insurance through an employer's group plan or individually,
you may be able to have the premiums deducted from your regular paycheck using pre-tax dollars if your employer offers a Section
125 cafeteria plan. If this option is available, take advantage of it. By using pre-tax dollars, you will reduce the amount
of income that your employer reports to the Internal Revenue Service. In turn, you won't owe as much in taxes. However, should
you become disabled the benefit will be taxable.
Are disability benefits taxable if I pay my disability premiums with pre-tax dollars through my employer?
Yes, disability premiums paid by your employer or by you on a pre-tax basis result in
the benefit being taxed
Are disability benefits taxable if I pay the premium through a Section 125 cafeteria plan?
The disability benefits are taxable if the premium is paid by your employer or if
you pay the premium before-tax through a Section 125 plan.
What is a cafeteria (Section 125) plan?
A cafeteria plan, also known as a Section 125 plan, is an employee benefit plan governed
by the provisions of Section 125 of the Internal Revenue Code. It's purpose is to provide a method for allowing the employee
to choose from among a menu of choices (hence the name) those benefits the employee desires to utilize. The benefits may be
fully or partially paid for by the employer.
If the employee is required to pay for some or all of the benefits, he or she typically
pays for them on a pre-tax basis. Employee paid pre-tax accounts are sometimes called "Flexible Spending Accounts" or "FSAs".
What happens in the event that Im only partially disabled?
Some policies pay a partial benefit. The exact amounts and types of partial disability
covered are spelled out in the policy. It's important to realize, too, that if you are partially disabled, you will not be
eligible for any Social Security benefit. Without coverage of your own for partial disabilities, you're likely to receive
no benefit payments at all.
What is the definition of partial disability?
In most disability insurance policies, "partial disability" is defined as an inability
to do some of the duties of your job or profession. To qualify for disability payments under this definition, you usually
have to experience a period of total disability first. The period of total disability is generally equal to the number of
days in the elimination period.
How does partial disability differ from residual disability?
Partial disability insurance is usually payable for a maximum of 12 months. Residual coverage
is generally payable for the entire benefit period, which could last for years.
Unlike residual coverage, partial coverage does not require that you lose part of
your income before you are eligible to receive disability payments. But again, those payments won't last for more than 12
months and may be limited to only three or six months.
My disability income policy has a Social Security benefit. What does this mean?
Many disability income policies, which will provide payments to the policy holder if he
or she becomes unable to work, include a Social Security benefit.
Social Security pays long-term benefits only if you are not able to perform any substantial,
gainful activity for more than a year or if your disability is expected to result in death.
According to "Wealth Enhancement & Preservation" (The Institute Inc., Denver), "Social
Security riders are added to disability income policies to recognize that the Social Security Administration may or may not
deem your disability sufficiently severe to warrant a monthly payment from the federal government. This rider provides a stated
monthly benefit in addition to the base payment if a payment is not awarded by the Social Security Administration."
Such riders can be expensive, but note that roughly half of all claims for Social Security
disability benefits are initially rejected. However, the results are much better when the claimant uses an attorney to file.
How can I find out if I qualify for disability payments from the Social Security Administration?
If you are sick, or if you are partially or totally disabled, you may qualify for disability
payments from the Social Security Administration. The list of qualifying health problems is relatively short.
You're not automatically eligible to begin collecting just because your employer or doctor
says you are unable to work. The decision to award disability payments will be rendered by your states Disability Determination
Service, which will examine your medical and work records before rendering its decision.
If your claim is approved, payments will begin about six months after you become
disabled. However, theres no waiting period for children or for people who are eligible for the governments Supplemental Security Income (SSI) program.
What types of medical problems qualify for Social Security disability payments?
If you're disabled or too sick to work, you may be eligible to collect disability
The list of health problems the SSA considers serious enough to trigger disability payments
is relatively short.
It includes heart disease, emphysema,
cancer, stroke, paralysis, loss of a limb and kidney failure. You may also be eligible to collect SSA disability payments if you lose some or all of your sight, suffer from chronic arthritis, are mentally retarded, chronically obese, have multiple personalities or are schizophrenic. Those who suffer from AIDS or are HIV-positive may also qualify. Other
medical problems may also qualify you to receive SSA disability payments.
The decision to award payments will be made by your states Disability Deter-mination Service. You would be well advised to use an attorney to file such
claims due to the complexity and legal nature of the procedure.
Is there a limit on the length of time that Social Security disability benefits can last?
Unlike some private disability-insurance programs, there is limit to the duration of Social Security disability benefits. If you qualify, you will keep collecting as long as your condition prevents
you from working.
Of course, the Social Security Admin-istration will
periodically review your case to see if there has been an improvement in your condition. If you're once again deemed healthy
enough to work, your benefits will be cut.
If you are still receiving benefits when you reach age 65, your disability benefit will be automatically converted to retirement benefits.
Should I hire an attorney to file a disability claim with Social Security?
For most people, hiring an attorney to help file a disability claim makes a lot of sense.
The Social Security Administration routinely denies virtually all claims on first filing. An attorney gives the agency a reason
to take your claim seriously and ultimately provides expert help in dealing with the hearing process.
Pays benefits to you and certain members of your family if you are "insured" meaning that you worked long enough and paid Social Security taxes.
Read more on this site.
How to provide for a disabled child
Raising kids with disabilities can be financially challenging, says the writer, a financial planner and parent. Fortunately,
there's government help available.
Resources
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