Protect Your Income with Disability Insurance

Physician's Money Digest, January 2006, Volume 13, Issue 1

Households frequently overlook buying individualdisability insurance, which replaces aportion of employment income lost due to along-term illness or disability. Many employees maybelieve they're already covered by such a policy atwork. But a recent survey by the Hartford FinancialServices Group found that four of 10 workers werenot covered by either a group or individual long-termincome-replacement policy. Moreover, those coveredby a group policy typically needed additional individualcoverage because group coverage is usually inadequate,financial planners say. When buying anincome-replacement policy, ask if it contains thefollowing key features:

•How do you define a disability? Policies typicallypay out according to one of three categories.The best, most expensive, and least available is called"own occupation."The policy pays if you cannotperform the duties of your current occupation, evenif you can hold another job (eg, a surgeon who nolonger can perform surgery but could teach). Themost common definition is "modified own occupation,"which pays only if you are unable to performa job that reflects your education and experience (thesame surgeon must be unable to teach).

Another definition is "any occupation,"in whichyou receive no benefits as long as you are able towork at some job, even if it pays substantially less.This definition is most common in group policies butin some individual policies, too. Some policies splitcoverage: they might pay for own occupation 1 or 2years, for example, and modified own or any occupationafter that.

•What limitations affect the definition? Apolicy may not pay out if the disability is due to war,pre-existing conditions, or self-inflicted injuries.Carriers also typically limit coverage for emotionaldisability, including depression, Alzheimer's, andsubstance abuse.

•What percentage of income does the policyreplace? Disability policies generally pay out 60%to 70% of gross income. However, if you paid all thepolicy's premiums, the benefits are tax-free. Benefitsfrom policies paid for by employers are fully taxable.Also ask if the private policy offsets its payouts if youreceive disability payments from Social Security oranother group policy.

•Will the policy increase benefits? As yourincome rises, can you boost benefits without providingnew evidence of insurability?

•Does the policy pay partial or residual benefits?These benefits cover loss of income due to aninitial partial disability, or to residual disability experiencedduring recovery from a full disability.

•Does the policy define recurrent disability?This language should spell out what benefits mightbe paid and how soon should a disability previouslycovered by the policy recur.

•How long will the policy pay benefits? Youcan save premium dollars by buying a policy with ashorter benefit period, but that's risky unless you'reclose to retirement. Many policies pay only to age 65,yet full Social Security retirement benefits may notstart until ages 66 or 67. Lifetime benefits are best foryounger workers who won't be able to build a solidretirement nest egg if they're disabled permanently.

•Does the policy make retirement payments?A rare but emerging feature offers to coverthe worker's retirement plan contributions in additionto the regular salary.

•Does the policy provide a cost-of-livingadjustment? The younger you are, the more criticalthis feature is; otherwise, payouts made years fromnow won't be sufficient.

•What is the waiting period? The longer youcan afford to wait before collecting your first payout,the less expensive the premiums. Having an emergencysavings helps here.

This article has been produced by the Financial Planning Association (www.fpanet.org), the membership organization for the financial planning community.