What financial shape would you be in if your paychecks suddenly stopped? For many, the situation wouldn’t be pretty. After all, if you became unable to work because of a disability, other income sources might not meet family needs in the long term.
Disability insurance compensates for loss of income if, because of illness or injury, workers become unable to perform their normal occupation.
“The question you have to ask yourself is, `If I got sick for a long period of time, what would that do to my income stream? Would that be a financial catastrophe?’ ” says J. Robert Hunter, president of the National Insurance Consumer Organization in Alexandria, Va.
“Single people buy too much life insurance, but they don’t buy any disability,” he says. “They probably need the latter and not the former.”
The likelihood of an individual between 25 and 50 years old being disabled for 90 days or longer is about three times that of their dying. And 30 percent of all disabilities are permanent, according to a 1985 Society of Actuaries study.
While many employers offer group disability insurance, the benefits usually last only from six months to two years. Individually purchased disability income insurance takes over where group policies stop. These policies can provide benefits up to age 65 or for life.
A good policy defines disability as being unable to return to work in your own occupation. A less liberal, and less useful, policy will term you disabled only if you are mentally or physically unable to perform any employment, regardless of your training.
For instance, a good policy would pay benefits to a surgeon if he or she became unable to perform surgery and earn $100,000 a year, even though the surgeon could still act as a consultant and earn $50,000.
But you’re not likely to get rich quick from disability insurance, collecting wads of money as you sit home and watch “Oprah” on TV. That’s because the insurance industry doesn’t want to encourage clients to sit idly and collect claims.
“This is one insurance they won’t sell too much of,” Hunter says. “They don’t want you to do better sick than not sick.”
So while disability insurance will pay benefits, it won’t supplant working. Typically, benefits equal only about 60 to 80 percent of income, and therefore give you an incentive to return to work or learn a new trade.
John Carington of Michigan City, Ind., 31, has felt the pinch of a reduced income. For six years, he worked as a truck driver. But in 1992, he took disability leave for post-traumatic stress disorder.
Carington has been covered by his employer’s group policy, but that coverage runs out soon.
“I was making about $1,670 a month, and that was tight. Now I’m making $1,000 a month on disability, and my bills aren’t going down, that’s for sure,” says Carington.
Since Carington doesn’t own long-term disability insurance, his only option is to apply for disability coverage through Social Security, which defines disability as being unable to work at any job, regardless of training. Social Security requires that you be disabled for five months before you apply; it also rejects most first-time claims.
Not everybody needs to purchase disability insurance, though. If you have a trust fund, you probably won’t need income insurance. If your spouse works and your family is not dependent on your wage, you might not need to buy insurance. Also, don’t get disability insurance if you’re not working or if you’re retired.
You don’t need to work in a dangerous occupation to think about purchasing disability insurance, but if you do work in a dangerous job, your premiums will be higher than average.
Premiums run from $300 to $2,000 or more per year, depending on age, income, occupation, health history, policy terms, benefit amount and waiting period. You should shop around to find the most economical coverage that includes features essential to your situation.
The longer you wait for benefits to kick in, the less your premiums will cost. In this way, the waiting period acts like a deductible on medical coverage. If your employer’s group policy covers you with a two-month disability plan, you can probably afford to take a 90-day waiting period when buying your own insurance.
Watch the terms of any policy, says George Essex, sales manager in Chicago for Paul Revere Corp., a Worcester, Mass., company that specializes in disability insurance (Provident and Northwestern Mutual Life are other large companies that handle disability insurance).
For example, a 30-year-old who buys a policy that provides coverage until age 67, includes a 90-day waiting period and pays out $1,000 per month in benefits could pay premiums of $350 per year, according to Essex. A 40-year-old would pay a $528 yearly premium to receive the same benefit of $1,000 per month.
Because benefits are tied to income-the percentage of income a customer receives generally decreases as his income increases-there’s usually a cap on the benefits that employees receive. For instance, someone who makes $35,000 per year might get a benefit of $2,000 per month, about 68 percent of salary.
Of course, other options are usually available at an added cost. You can pay extra for a cost-of-living adjustment that counters the effects of inflation, and pay more for the right to adjust your policy if you receive a salary increase. Costs vary depending on age.
When looking at a disability policy, experts recommend that you consider the following points:
– Ask your employer what the company offers in terms of sick leave and short-term disability.
– Look carefully at the definition of disability. A good policy will grant disability if you can no longer perform duties of your current employment.
– Ask about pre-existing conditions and previous health history. Like many insurance policies, benefits don’t cover pre-existing conditions. After a heart attack, you may be able to purchase disability insurance, but it wouldn’t cover loss of income stemming from a heart condition.
– Determine whether the policy offers partial payments. If you qualify for disability offered by Social Security, will your policy pay the difference, or will all payments stop?
– Check specific terms. Many group insurance companies limit coverage stemming from mental, drug or alcohol problems to one or two years. Individual policies may be more liberal.
