By David S. Bross, Esquire
While most Americans insure their lives and material assets, like their homes, cars, etc., many overlook the need to protect their most valuable asset — the ability to earn an income.
According to Kenneth Podell, CLU, a financial advisor with Mass Mutual, insurance claims studies indicate that the odds of becoming disabled for 90 days or longer are much greater than dying during one’s work years.
- At age 27 = 2.7 times greater
- At age 42 = 3.5 times greater
- At age 52 = 2.2 times greater
This article will briefly review individual disability insurance (“D.I.”).
Individual Contract (“D.I.” Policy)
An individual who is concerned that a disability may drastically reduce or eliminate current income will often purchase individual income insurance – a “paycheck protector”– from an insurance carrier. An application is completed, providing medical history for at least the past five years, employment background and income for at least the past three years, and other documentation, which may be required for underwriting purposes (the company assesses whether it’s worth taking the risk). These policies are commonly underwritten for white-collar workers. There are some available for blue-collar workers, but they are often limited to five years of coverage. Most of these policies do not offset for workers’ compensation or social security benefits.
Benefits, Costs, Options
Underwriting guidelines until the past few years were, generally, to allow insurance to cover up to 60% of gross income. There is very aggressive risk management now, so applicants may be lucky to get 50%. If an applicant’s income is $3,000 per month, the company may allow $1,800 per month in Disability Income. The less expensive policies have longer elimination periods (or “deductibles”). That is, if one secures a policy with a 30-day elimination period (where the check becomes payable for the period commencing on the 31st day of disability), that will be much more expensive than a policy with a 90-day elimination period. Just as with a life insurance policy, options or “riders” a/k/a “endorsements,” are available at additional costs. There is the “option to purchase additional insurance” without medical re-examination, which is generally offered every three to five years up until a cut-off age, and, which still requires proof that current income has increased to justify the amount of increased coverage requested. Some D.I. policies stop coverage at age 65, or reduce benefits payable if disability occurs after age 60, but then offer “lifetime” riders so that the monthly income will go up annually with inflation. Finally, as to cost, D.I. policies cost more to initially purchase the older you get, but, premiums do not go up once purchased. Benefits are tax-free, since the insured pays the entire premium.
What to Look for in a Disability Insurance Policy
Definition of Disability: Are education, experience, and past earnings taken into account in determining whether the insured is qualified to resume work? Many policies provide for an initial own-occupation definition of disability, for a specified period of time, after which a different definition of disability applies.
Partial or Residual Benefits: Partial or residual disability benefits may be paid in some policies when the impairment allows the insured to perform only a portion of his or her duties. The provision may also pay benefits in the event the disability reduces the insured’s income by a certain amount (for example, 20% or more) from pre-disability levels.
Cost of Living Adjustment: Is there a cost-of-living adjustment (COLA) which would increase benefit payments after a disability occurs?
Cancellability and Renewability of a Policy: Except for nonpayment of premiums, is the policy non-cancellable or guaranteed renewable? “Non-cancellable” generally means that the policy can be renewed each year at a fixed premium, for a specified time period. Guaranteed renewable is similar, but allows the insurance company to increase the premium.
Waiting and Elimination Period: Is the waiting or elimination period proper for the insured’s circumstances? Commonly available periods include 90, 180 and 360 days. Naturally, the longer the elimination period one selects, the lower his or her premium payments will be. However, a person’s needs, cash reserves and income sources should be the deciding factors in selecting a proper elimination/waiting period.
Benefit Period — What benefit period should be selected? Since a long-term medical disability can be financially devastating, one should elect a long term benefit where possible. Some companies offer lifetime benefit periods, but periods as short as 24 months to 60 months are also available.
My next column will look at group disability insurance policies, commonly referred to as “LTD” policies.