Protect Against Inadequate Disability Insurance
You probably figure that if you have health, life, auto and homeowner insurance, you’re pretty much covered against financial catastrophe. Unfortunately, that still may not be the case.
If you don’t also have adequate long-term disability insurance, you’re still quite vulnerable to financial calamity if you suffer a crippling disability that renders you unable to work or earn your full income.
Disability insurance is often the biggest gap in many people’s coverage. It can be expensive, running from as low as $200 or $300 to as high as $4,000 a year or more if you have health problems, are in a high-risk job or are above age 55.
But the need for it is compelling. If you’re under age 65, the risk of disability is much greater than the risk of death, experts say. Disability coverage will provide you and your family with income to replace what you might lose from being unable to work because of a car accident, heart attack, cancer, mental illness or other problems.
“Although life insurance is truly necessary only for wage earners with dependents, disability insurance is strongly recommended for almost anyone who is employed, regardless of whether he or she has dependents,” says Jonathan D. Pond, president of Financial Planning Information, a Watertown, Mass., publisher of personal finance materials.
Unfortunately, what most people think is their disability coverage really is inadequate. Workers compensation coverage is often limited only to short-term, work-related accidents--meaning that if you get into a car accident while on vacation you won’t be covered. In fact, most accidents and illnesses are not job related. Workers comp also usually limits benefits and the period you can receive them.
Social Security most likely won’t do the trick either. You may not qualify for disability benefits, and the payments may not be enough to maintain your lifestyle.
You might have employer-paid disability insurance through work, but many of those plans also are inadequate--paying far less than your income, ceasing benefits after only a few months or carrying too many restrictions that make it difficult to qualify for coverage.
Consequently, you may need to look for disability coverage that either stands on its own or supplements your group plan at work.
When doing so, seek broad coverage. Make sure your policy covers all types of disabilities and also protects you if you are only partially disabled. Many policies are limited or subjective in what they will cover, leaving some doubt as to whether you might qualify. For example, some policies may consider you to be disabled only if you cannot perform the normal duties of your occupation. Others may limit coverage only to accidents, leaving you unprotected against heart attacks, strokes or other health problems.
You’ll also want to protect against your insurer raising your premiums or canceling your coverage. Thus, get a policy that cannot be canceled and is guaranteed to be renewable.
How much of your income should you insure for? If you are paying for the policy yourself, aim to replace 60% to 70% of your current before-tax earnings. You don’t need to replace 100% of those earnings because disability benefits are tax-free if you paid for your own insurance.
You can also get an option-to-purchase rider that ensures you the right to purchase more insurance in the future; that can be valuable if you expect your income or family expenses to rise. Also available are inflation riders that step up your benefits based on increases in the consumer price index or other inflation measures.
How long should you insure for? The best bet is to get coverage that will carry you all the way to the age of 65, when retirement benefits can take over. You can save a lot in premiums by settling for shorter-term coverage--up for five years, for instance--but this may not be prudent.
Instead, if you really need to save money, increase the waiting period during which you must wait before receiving benefits after you become disabled. Usual waiting periods are one month, 60 days, 90 days, 120 days or one year. The longer the waiting period, the lower the premiums. If you have large savings, employee benefits or other resources to draw on during the first few months of a disability, a longer waiting period may be a sensible choice.
What are your options for shopping around? First, find out how much, if any, group coverage you have through your employer. If the coverage is inadequate, you may be able to supplement it at a lower rate than by buying a new policy on your own. And remember that any benefits you receive are tax-free if you paid for the coverage yourself.
You might also get coverage through your company retirement plan, or through a disability coverage option on your health or life insurance plan.
How much should you expect to pay? Premiums can vary widely according to your age, occupation, waiting and benefit period, and whether your coverage is group or individual. In some hard-to-insure cases, you might not get coverage at all.
The older you are, the higher the premium. Premiums also are higher if you have a higher-risk occupation, or if you have an existing medical problem, work part time, are self-employed or unemployed.
Premiums also vary widely between companies. Talk to different agents and shop around.
