Our goal at I&E is to equip our clients with the strategies and tools to maximize wealth building and preservation, to enhance legacy creation. One of the tools of the trade is disability income insurance. It provides comprehensive asset protection, particularly for those who currently rely on a paycheck. The following article will act as a primer for an ongoing series on this topic.
Before we begin our overview of disability income insurance let’s consider one important point. It probably goes without saying but you have a higher likelihood of becoming disabled by age 65 than dying in the same time period. And even a 2 year disability can set you back up to 10 years in your retirement plan due to the loss of income.
Now we are not about to tell you to forgo your life insurance and get disability insurance instead. A properly designed cash value policy can provide numerous benefits that you do no want to be without.
What is Disability Income Insurance?
Disability income insurance definition: Disability income protection provides benefits that are designed to replace your current income. It is an insurance policy between the insured and insurer, that provides income replacement, i.e. cash money, to the insured if the insured is too injured or sick to return to work after a certain period of time set forth in the policy.
By taking out a disability income insurance policy, you are getting coverage for the hen that gives you the golden eggs to buy the house, car, jewelry, and other assets. For those of you who do not have current cash flowing assets to supplement your income, having a backup plan, like disability income insurance, is an easy decision.
Look at DI insurance as an important backup plan of life that takes care of your lifestyle when you are unable to work due to any sort of illness or injury.
Remember, most companies do not cover off the job accidents or sickness. Apart from workers compensation, there is often nothing available to the employee who is injured off the job. So, a disability income insurance policy provides a bridge that acts a life preserver in such instances.
However, as we will cover in future articles, disability income insurance can also be a powerful tool for business succession if a partner is disabled and can no longer continue to contribute to the business.
Additionally, DI insurance in the business setting also is valuable as a form of key man insurance.
So, with that introduction out of the way, let’s dive into some definitions.
Disability Insurance Elimination Period
Ok, don’t scratch your head yet. Let me simplify this for you. From the time you get disabled to the time you start receiving disability income insurance benefits is called the elimination period.
Basically, it’s the waiting period before you start receiving the disability benefits. Depending on a case by case basis, the elimination period would be several weeks, months, or years.
Typical elimination periods for long-term disability insurance range from 30 days to 180 days. However, you can choose even longer periods, extending out as far as 730 days in some cases depending on the insurance company.
As you might have already gauged by now, the longer the elimination period, the smaller the premium amount.
On the other hand, the shorter the elimination period, the more amount you will have to pay towards the insurance premium.
So, to make your policy more affordable, you might be better off choosing a longer elimination period. This is one area where you have flexibility to tailor your policy to your goals and objectives, while maintaining on eye on your budget.
Disability Insurance Benefit Period
How long you will receive the disability benefits in the event you get disabled would depending on the terms of the policy. The most common benefit plan covers you up to the age of 65.
So, you will be eligible to receive disability benefits up to a maximum age of 65 years. Other benefit plans that you could choose are 5 years. 10 years, or longer.
There are also different disability insurance plans that can cover you beyond the age of 65. You do get a lot of flexibility here and should tailor your policy based on your budget, goals and objectives.
So, make a choice that best suits your needs. As common sense would tell, the shorter the benefit period, the lower you would pay on insurance premium and the longer the benefit period, the higher the premium.
As far as the benefit amount goes, it really depends on your age, occupation, income, and the coverage taken by you. Remember, the disability benefit is an excellent thing, but only if you have enough of it. So, you will have to work this out in advance while taking a policy.
Most disability insurance companies allow a maximum benefit amount in the 50-60% range of your current monthly gross income.
Your disability insurance benefit amount is paid to you from the insurer income tax free.
Short-Term and Long-Term Disability Insurance
You can choose either short-term or long-term disability insurance for compensation if disability strikes.
A short-term disability insurance policy is meant to replace a certain portion of your income when disability strikes in the short term. The benefit period is usually for a short time, such as 3 to 6 months, and it typically covers around 60% of your salary.
As such, you get a choice to choose the benefit duration when you opt for the policy. For those who don’t know, statistics suggest that at least 1 out of every 3 Americans between the ages of 30-65 gets disabled for 90 days or more. So, if we were to believe the numbers, short-term disability insurance becomes a necessary evil for most of us.
As the name hints, the long-term disability insurance takes care of you and your family during times of disability for a longer period of time than short-term disability insurance.
Depending on your plan, the paycheck protection usually starts after 90 or 180 days. Typically, you receive around 55 to 60% of what you earned before you were disabled. You can choose anywhere from 2 years, 5 years, or even a much longer duration if it fits the bill for you.
Long-term disability insurance offers long-term peace of mind and financial protection so that you can focus on getting better and not worry about the piling bills. The long-term disability insurance policy will help you keep up with your expenses as long as you remain disabled and eligible under your policy.
Guaranteed Renewable vs. Noncancelable
Don’t let some of the insurance jargons bore you to death or cause you to get “analysis-paralysis”. There are two definitions that are helpful to know when considering the type of disability income protection you need: Guaranteed Renewable and Noncancelable.
For those who don’t know, a noncancelable and guaranteed renewable policy work together. As a smart consumer, your best bet should be to get a noncancelable and guaranteed renewable policy to get your contract renewed for sure without any premium increase.
Guaranteed renewable is defined as the ability to continue your policy under the terms of the contract for the full extent of the policy. However, simply having guaranteed renewable in your policy does not guarantee your premiums will remain the same. That is where noncancelable comes in.
Noncancelable disability income insurance is coverage that maintains a fixed (i.e. level) premium throughout the life of the policy. This provision is only offered for certain occupation classes. It is a luxury but it is not necessary.
Simply put, choosing a policy that contains both a noncancelable and guaranteed renewable provision is a sure-fire way to ensure that the insurance carrier is not able to change the benefits/premium or any other contractual terms of the policy. You will also be locking the premium rates for your career lifetime without a raise at the time of renewal. Basically, you will have the playing field in your favor.
Own Occupation vs. Any Occupation
This is an area where one should be careful. So,let’s understand the difference between own occupation and any occupation.
With “any occupation.” an insurance carrier’s appointed examiner will look for a transferable skill or job to get you going in life so that you can be placed off the receivable income. In other words, if you are deemed fit to work in any gainful occupation that goes well with your education, skill sets, or experience, you can be denied future insurance benefits.
So, if your policy has something that reads ‘any occupation’ you could find yourself having a difficult time collecting your disability benefit unless you are totally disabled.
If the policy reads, ‘own occupation,’ you won’t be asked to switch your profession to support yourself. The insurance company will go ahead and pay you the money without any fuss when you are not able to do the important duties of your specific work profile or a job like that you were previously performing at another company.
Own occupation is not available for all occupational classes. It is a luxury, but it is not needed unless you have a job in a highly skilled profession, such as a physician or some other white collar occupation.
There are typically around 5 or 6 different levels of occupational classes. At the higher level occupational classes 4-6 you have your “safer” occupations ranging from nurse practitioners, real estate brokers on up to high level executives, pharmacists and attorneys.
At occupational classes 1-3 you have your occupations that have more risk involved, such as environmental risks and inherent dangers within the occupation itself. For example, at occupation class 3 you might have dentists and surgeons. Although those are fairly “safe” jobs, there are environmental factors that might pose more of a threat than the higher level occupational classes.
At occupational classes 1-2 you have your occupations that require more physical exertion and dexterity to perform, with occupational class 1 having even higher levels of environmental concerns to consider.
Insurance Companies offering Private Disability Income Protection
There are many companies that specialize in group disability insurance plans. However, your choices thin out noticeably when you begin to look for individual disability insurance or supplemental disability insurance.
The following list is our current picks for the best individual disability insurance companies. Both short-term and long-term policies are available, depending on the disability insurance provider.
|Individual Disability Insurance Company
|A.M. Best Rating
|Mutual of Omaha
We strongly recommend any and all of our clients who rely on a paycheck or their specialized skills to consider disability income protection. This is particularly true for anyone who does not have other income producing assets.