What single event leads to more than fifty percent of all mortgage foreclosures in the USA? If you said disability, you would be correct. It would surprise many to know that your chances of becoming disabled is greater than premature death at every working age from 20 to 65. By the way, premature death accounts for only two percent of the mortgage foreclosures in the country. Yet fewer of us have disability income insurance than have life insurance. Three in ten workers entering the labor force today will become disabled at some point before retirement.
What are the sources of income we could count on in case of disability? An overwhelming number of us (71 percent) live from paycheck to paycheck with little in personal savings. Unless you have replacement income from disability income insurance, income from other sources, or sufficient savings, you and your family will be exposed to great economic insecurity in the case of long-term disability. It can be argued that disability can be more financially devastating to the family than premature death. In the case of long-term disability, earned income is lost, medical expenses must be paid, savings are depleted, employee benefits are lost or reduced, and often someone must care for the permanently disabled person. While social security disability or workers compensation benefits may be available in certain situations, the best solution to this potential problem is the purchase of disability income insurance.
So, let's look at some of our options for disability income insurance. There are a number of options when considering disability income policies. First, you may have the option of buying group disability income policies through your employer. Often the employer will pay all or part of the premium as an employee benefit. These plans fall into short-term and long-term policies. Short-term plans generally will begin paying out benefits shortly after the worker has become disabled, but the benefit period is generally for either 13- or 26-weeks. Long-term plans generally do not begin to pay benefits for 30 days to six-months. However, they will pay benefits for a period from two-years up to age 65. Employers who provide both of these plans for employees will usually coordinate the two plans where there is no overlap. While any disability period creates income loss, long-term disability will prove to be the most devastating and, thus, is the preferred coverage if you can only have one plan.
If you are self-employed or work for a firm that does not provide disability insurance to its employees, you may be able to purchase an individual long-term disability (LTD) plan from an insurance company. The plan features along with you age and occupation will play a major role in determining the cost of the plan. When examining a policy, you must consider the cost now and in the future. Many plans are "guaranteed renewable" which means that your policy cannot be canceled by the insurer regardless of changes in your health condition as long as you pay your premium when due. The "guaranteed renewable" contract allows the insurer to periodically increase the premium for the entire class of insureds in the state of residence if claims costs warrant. However, this feature assures that no one insured can be singled-out for a rate increase. This type of contract is more widely available with regard to occupations than the other major type of policy - the "non-cancelable" contract. The "non-cancelable" contract assures that the original contract will stay in force so long as the premiums are paid when due and that the premium will not increase during the life of the contract. Many insurers provide these types of plans for professionals and some executives. For example, these "non-cancelable" policies are popular with medical doctors, dentists, and lawyers.
In addition to the renewal provisions in the contract, there are other major provisions you need to consider in purchasing an LTD policy. First, you need to decide on a benefit period which states how long you will receive the benefits if you become disabled as defined in the contract. Benefit periods include two-, five-, or ten-years, or up to age 65 or 67. From a protection and risk management standpoint, the longer-period policies are preferable. Another choice that you must make is the benefit amount to be paid to you each month if you do become disabled as defined in the contract. To prevent over-insurance and to reduce moral hazard and malingering, most insurers limit the amount of insurance sold to 60 to 70 percent of the policyholders gross earnings. Next, the definition of total disability is one of the most important provisions in an LTD policy as it determines when you become eligible to receive a benefit under the policy. Most professionals prefer the "own occupation" definition. It defines disability as the "inability to perform the material and substantial duties of your regular occupation."
While this is the most expensive of policies, it is desirable for the person who has spent much time and resources to achieve a specialty occupation such as a surgeon. It assures her that if she damaged a hand in an accident that resulted in tremors which no longer allowed her to perform surgery, she would draw her benefit under the LTD policy. Other definitions might not consider her disabled if she can "perform the duties of any occupation for which you are reasonably fitted by education, training, and experience". If she could teach in a medical or nursing school, she would not be considered disabled under such a definition. However, she would suffer a major loss in earning potential in this example, perhaps hundreds of thousands of dollars per year. A final decision that needs to be determined in purchasing an LTD policy is the choice of elimination period, the time after a qualifying disability when benefits are not paid. This period may range from 30 days to one year with 90 days being the most common. All things being equal, the longer your elimination period, the lower your LTD premium. In choosing this period, it is important that you have an emergency fund that will cover your expenses for this length of time should you become disabled.
The risk of long-term disability is one that should be considered by all of us, regardless of occupation. This is a complicated decision that should be approached in conjunction with a professional insurance agent or financial adviser who specializes in the area.