|The possibility of sustaining a long-term disability from an accident or illness is something most of us would rather not dwell on. But, there is a way to help protect yourself and your family should you lose your ability to earn an income.Disability income insurance can play a key role in your overall financial plan and provide a benefit to help replace a portion of your income in the event you become too sick or injured to work.
Evaluating Your Needs
While most people understand the necessity and value of life insurance, many may overlook the valuable role disability income insurance can play in maintaining financial independence. How would you meet your everyday expenses if an injury or illness prevented you from working? For most people, Social Security Disability benefits cannot be solely relied upon to replace lost wages. You must meet very specific criteria to qualify for disability benefits, and it is often necessary to wait several months for payments to begin. Also, Social Security benefits may not be sufficient to maintain your current standard of living.
As an alternative, you could self-insure. However, even if you save 10% of your salary each year, one year of disability could deplete many years of savings. Or, perhaps your employer provides a salary continuance plan. In general, employer-sponsored plans are limited in scope and duration, and coverage is not portable upon termination of employment (except in certain executive disability policies). Workers compensation may be an option in some cases, but only covers injuries that occurred on the job. Eligibility and benefits vary by state. The bottom line is that losing your ability to earn an income may make it difficult to make ends meet.
Types of Coverage
Depending on the terms of your policy, disability income insurance provides a benefit to replace a percentage of your income, in the event of a qualifying disability. The cost of coverage is based on such factors as your occupational risk level, age, medical history, and the scope of coverage you wish to purchase. Individual disability income insurance requires an application process and is subject to underwriting approval.
If your employer has a salary continuance plan, ask about the dollar amount of coverage, waiting period, and duration of payments, so that you can coordinate your personal coverage with your employer-provided benefits.
When examining the provisions outlined in a potential disability income insurance policy, remember to review the following:
- Definition of total disability: Does the policy provide coverage if you cannot perform the duties of your own occupation or the duties of any occupation? A policy that refers to your “own occupation” generally pays benefits if you cannot return to work in your field or if you return to work in a lower-paying job or a job in another occupation. A policy that refers to “any occupation” generally pays benefits only if you are unable to perform any job: your own job, a lower-paying job, or a job in a new occupation.
- Length of benefits period: Depending on your choice of coverage, the policy may pay benefits until you reach the age of 65, the age at which many individuals choose to enter retirement.
- Waiting period: Waiting periods (also called elimination periods) prior to receiving benefits are typically between 90 and 180 days, depending on your policy. While a shorter waiting period requires a higher premium, a longer waiting period may mean more out-of-pocket costs before the benefits begin. The waiting period is determined when a policy is issued.
- A noncancelable clause: With a noncancelable clause, the insurance company cannot cancel or change your policy or increase your premiums before you reach age 65, provided the premiums continue to be paid.
- Residual disability benefits: With this rider, the policy pays benefits if you return to work while you are disabled and earn less (usually at least 20%) than your pre-disability income as a direct result of your disability.
- Future insurability: This rider allows for the purchase of additional coverage in the future without regard to medical insurability.
It is important to note that there may be an additional premium for adding riders.Disability income insurance can help your greatest asset—your ability to earn an income. Be sure to consult with a qualified insurance professional to determine an appropriate amount of coverage for your situation.
Source: Financial Planning Strategies 2/10/14 Author Ryan Howison