Speak with an experienced advisor! If you are like most people, your biggest asset is your ability to earn an income. Without your income, it would be hard to survive much less maintain your same standard of living. The three major threats to your financial security are death, illness or injury. Life insurance is the practical way of securing your family in the event of death. Disability income insurance is the financial planning solution to the threat of a sustained illness, accident or injury.
Why Disability Insurance?
The reason why disability insurance is so critical is that for most ages, the likelihood of disability is significantly higher than death. However, the sad truth is that many people buy life insurance but neglect to consider disability insurance. Below are some statistics on disabilities that emphasize how important it is to protect your family from a disabling accident or illness.
- Disability is the cause of nearly half of all home foreclosures.
Source: Compton Insurance Marketing, 2002 - A fatal injury occurs every 5 minutes. A disabling injury occurs every 1.5 seconds.
Source: Injury Facts®, 2003 - Almost 3 in 10 of today’s 20 year-olds will become disabled before reaching age 67.
Source: Social Security Basic Facts, July 2004 - 1 in 5 people will be disabled for one year or more before age 65.
Source: Compton Insurance Marketing, 2002 - For 30-year-old males, the risk of a long-term disability is 4.1 times more likely than the risk of death. For 40-year-olds, it is 2.9 times more likely. And at age 50, it is 2.2 times more likely.
Source: National Safety Council, 2003 - Leading contributors to disability burden are road traffic accidents, alcohol use, cardiovascular disease, major depression, and ischemic heart disease.
Source: World Health Organization, 2003 - Currently, only 15% of workers have any type of disability insurance (DI) coverage.
Source: “Life Insurance Industry Primer,” JP Morgan, January 2004 - 72% of the private sector workforce has no long-term disability insurance.
Source: Social Security Basic Facts, July 2004 - 32% of the workforce has no savings set aside specifically for retirement.
Source: Social Security Basic Facts, July 2004
How Does Disability Insurance Work?
Simply put, disability insurance protects your income in the event of a disabling accident or illness. A disability policy therefore guarantees you a monthly income if you are disabled. For example, if your monthly pre-disability income is $10,000, you can purchase a policy that provides for $6,000 in tax free monthly benefits if you are disabled. If you sustain a disability, there is a brief “waiting period” called an elimination period before benefits are payable. Once the elimination period is satisfied and you continue to be fully disabled, the insurance company will stroke a check for $6,000 monthly as long as you are totally disabled. Benefits can be payable for 5-10 years or to age 67 depending upon your contract. If you fully recover from your disability and return to work, benefits will cease but the policy is still in effect to cover a potential future claim.
The key factors to buying disability insurance are your age, occupation, income and health. Unlike life insurance underwriting, which is focused mainly on your health, disability insurance underwriting is also concerned with your occupation and specifically your job duties within your occupation. For example, white collar professionals such as attorneys, sales professionals, executives and physicians will generally pay lower rates because the likelihood of disability is relatively low. On the other hand, if you are a contractor, courier, skilled laborer or have a job which requires an “on-site” presence, you can expect to pay higher rates as your risk of disability is higher.
Most disability insurance companies will allow you to insure up to 60-70% of your current income up to certain limits. However, the more money you make, the lower the percentage of income you can protect. Some companies will also integrate (or reduce) your benefits with social security disability if you qualify.
Applying for disability insurance is very similar to applying for life insurance. You will need to complete an application for insurance as well as complete an insurance exam. Additionally though, when applying for disability insurance, you will need to provide proof of income which generally means supplying tax returns and or W-2’s. Finally, a personal history interview may be conducted by a third party just to verify the accuracy of your application and exam information.
Key Factors in Disability Insurance Policies
Disability insurance companies all have their own competitive niches and policy features and benefits that must be carefully compared and understood in order to make sure the most appropriate policy is selected. Some of the most important features and benefits of disability policies include: the specific definition of disability, benefit period, residual benefits, cost of living adjustments, elimination period and future options to increase coverage. Each of these is described briefly below.
Definition of disability – The definition of disability is what determines when disability benefits are triggered. In other words, “Are you disabled?” There are several different definitions of disability and it is important to understand which one you need to be adequately protected given your occupation.
Elimination period – The elimination period or “waiting period” is the time that must transpire between your disability and the time benefits become payable. Typical elimination periods are 30, 60, 90 and 180 days. The 90 day waiting period is the most common because of its affordability.
Benefit period – The befit period refers to the length of time benefits are payable upon disability. Benefit periods can be 2 years , 5 years, 10 years or to age 65 (or 67 with some companies).
Residual benefits – Residual benefits are payable if you are a disabled but not totally disabled. With most companies, if you have residual benefits, they are payable if you have at least a 20% loss of income. These benefits are prorated based on your percentage of lost income multiplied by your monthly disability benefit.
Cost of living adjustments – Cost of living riders are available and provide an increased benefit annually if disabled based on the percentage annual cost of living increase in the Consumer Price Index.
Non Cancellable – The non cancellable feature guarantees that your policy premium will remain fixed regardless of the claims experience of the insurance company.
Guaranteed Renewable – A guaranteed renewable contract allows you to continually renew the policy as long as you desire usually up to age 70. The insurance company cannot cancel your policy for any reason. However, your rates can be increased.
Future options to increase coverage – Future increase options allow you to increase your monthly disability benefits without proof of health. However, in order to exercise the benefits increase, you will have to provide financial documentation that shows the additional coverage is justified.
Do You Need Individual Disability Insurance?
To determine your need for disability insurance, ask yourself the questions below:
- Could your family continue at the same standard of living without your income?
- How long would your savings hold out?
- Could you afford to keep your home? If not where would you live?
If you answered “No” to question #1 or #3 or you could not live off of your savings for an extended time period (until you recover), then you need disability income insurance. You should at least secure enough disability coverage to pay your mortgage and pay for the bear necessities in case you get sick or injured.
Summary
Without your income, it would be hard to survive much less maintain your same standard of living. Adequate disability income insurance is a critical component of any sound financial plan. No matter what your occupation, a disability can have a substantial impact on your ability earn an income. Please do not overlook the importance of this valuable protection. Receive a custom disability insurance quote or contact MEG Financial today at (877) 583-3955.
