Twin Cities Business, Personal Finance, October
2007, By Jeff Dekko
Certain things in life are disagreeable. When
it comes to financial chores, one of the most
disagreeable things I do each year is write
a rather large check to pay for my disability
insurance. But writing that check is like taking
bad-tasting medicine. You know it doesn’t taste
good, but it’s necessary. Very necessary.
First are the people close to you. I write
that check each year because I can imagine myself
sitting – or lying – on the couch day after
day, disabled in some way, uninsured and not
able to contribute to my family’s welfare. Worse,
later in my work life I worry about something
happening to me that makes me a burden on my
kids. At least if I die, life insurance will
help mitigate the loss of my income. Disability
is something else.
Then there are the odds. According to the Health
Insurance Association of America, about 30 percent
of Americans aged 35 to 65 will suffer a disability
lasting at least 90 days sometime during their
careers. Three out of ten. And 46 percent of
home foreclosures, according to the U.S. Department
of Housing and Urban Development, occur because
the homeowner has suffered a disability and
can no longer make mortgage payments.
Yet, just 36 percent of all full-time employees
have access to long-term disability insurance
through their employers, according to the LIFE
Foundation of Washington, DC, and fewer than
six million individual disability policies are
in force in the U.S.
“Most company-issued disability policies only
cover 50 to 60 percent of your salary and set
a monthly maximum,” says Corey Anderson, a disability
consultant with SecuraDI Consultants, LLC, of
St. Louis Park. “Plus, most of these plans only
cover base salary and not overtime, commissions,
bonuses, or stock options. This can be an issue
of special concern for highly compensated employees.”
And by the way, those benefits are typically
fully taxable.
Social Security (SS) disability benefits aren’t
much of an option either, Anderson says. “Social
Security benefits are one difficult to qualify
for,” he said. “They require an individual to
be completely disabled for at least a year with
no hope of recovery and are generally limited
to $2,000 a month or less. Finally, whatever
you do receive from SS will reduce your employer
group disability insurance benefits.”
Disability insurance premiums typically cost
one- to three percent of annual income, Anderson
says. Prices vary based on your age, gender,
health history and occupation – and the specifics
of the plan.
We can’t cover all of the specifics of plan
design here – that’s something to discuss with
your financial advisor. But we can touch on
some of the big variables, which include:
- How much you want to be paid in benefits each month you’re disabled. The higher the benefit, the higher the premium.
- How long can you go before tapping benefits? The longer the waiting period, the lower the premium.
- The definition of disability. Do you want benefits for inability to perform in your specific occupation or in any occupation for which you are qualified? Coverage may also specify inability to work at all or inability to work a full day. Try to lock in on the broadest possible definition of disability.
-
Your occupation: “Some occupations, such as administrative people or sales, tend to pay higher premiums because their claims experience is higher than, say, executives, accountants and engineers,” says SecuraDI’s Anderson. “Understandably, premiums are also higher for individuals with more hazardous jobs, such as construction.”
- Length of benefit period: Do you want benefits for two years? Five years? Or until you’re 65, 67 or for your lifetime? Each option has an impact on price.
- Cost of living adjustment: You’ll pay extra for this feature, but this feature increases a person’s benefit after a year’s worth of benefits to help your benefits keep pace with inflation.
- A "future purchase option" allows you to buy more coverage as your income increases. This is especially good for people just starting their careers.
Europeans and Australians call disability insurance “income insurance.” That may be a better way of thinking about this. If you are 40 years old and net $50,000, over the 25 years until retirement you will earn $1.25 million – and that’s assuming your income does not grow. That’s an asset worth protecting.
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