What to look for in a disability insurance policy
The consequences of a disability are alarming. A recent study of consumer bankruptcy filings identified an injury or illness as the third leading reason for bankruptcy, behind medical bills (#1) and a lost job (#2) according to the Council of Disability Awareness (CDA) website. Unfortunately Worker's Comp only covers time away from work if the illness or injury was directly work related. Yet according to the CDA, almost all disabilities are non-occupational in origin, meaning not work related. Social Security is also less reliable -- the CDA reports only 34% of Social Security Disability Insurance claimants had their applications approved between 2006-2015.
In my opinion, the greatest risk is not a short-term disability, but a long-term or prolonged disability. A long-term disability, lasting more than one year, can significantly erode your savings. In addition, a long-term disability may make saving for retirement or college all but impossible. With the increased medical bills and potential loss of earnings, there may simply not be enough cash flow to support the pre-disability lifestyle. Disability insurance provides a critical safety net in the event an illness or injury prevents you from working. However not all disability policies are created equal.
What is disability insurance?
One solution to help pay the bills in the event an illness or injury prevents you from working is disability insurance. Disability insurance pays you a monthly benefit if you qualify under the terms of the policy. Generally to qualify there is an "own occupation" definition and/or a "loss of earnings" test. An "own occupation" definition of disability means due to the disability you are unable to perform the essential duties of your present occupation. A "loss of earnings" means due to the disability you encountered a substantial loss of income or earnings, generally more than 20%. If you qualify for disability benefits, after meeting an elimination period or waiting period (usually 90 days) a disability policy will pay you a monthly benefit (income tax-free if you paid the premium with after-tax dollars). The benefit is usually or should be payable to your age 65 as a minimum.
What to consider when buying a disability insurance policy?
There are many bells and whistles when considering a disability policy, but generally speaking there are five main features:
- Inflation protection - You want your monthly disability benefit to increase with inflation
- Own occupation definition of disability - This is the best and most favorable for the insured
- Extended partial benefit - Chances are you will return to work in some capacity. A partial benefit will pay even if you can work but are unable to earn enough as your pre-disability income.
- Favorable company rating - This is important considering the amount of time or years the company can be on the hook for paying your claim.
- Guaranteed renewable - The company can't discontinue the policy regardless of your employment or a change in your health. Also, having a guaranteed renewable premium is important so there is no increase in your premium bill.
Group disability insurance is helpful, but many times group policies fall short. Group plans may not have a favorable definition of disability, may not provide for a partial disability, or sometimes are not portable meaning if you lose your job you can't take your policy with you.
Business owners have other options including Business Overhead Expense protection which pays a benefit for the business bills like office rent and staff salaries. Also there is Disability Buy Out protection if your business partner gets injured, this policy will pay a benefit to buy out his or her share of the company.
Finally, highly compensated executives have other options including add-on coverage for more monthly benefit (Executive Carve Out Plans) and Disability Retirement benefits which contribute to a 401(k) in the event of a total disability.
As you can see, there is a lot to consider when contemplating disability insurance and a competent adviser can help you navigate your options. For a complete disability insurance review -- including a review of your group and none-group coverage -- and a complimentary quote, please feel free to email me.