November 06, 2007
After reading many finance blogs - I come across a similar theme: We are educated, make good money and the world is our oyster; everything we have is due to our ability and good decision making; all we have to do is plan carefully, invest well and we’ll all retire millionaires. Being a bit older than most bloggers, I’d remind them that they’re all about 1 second away from losing their lucrative Silicon Valley programming jobs. Accidents happen to all people not just the “stupid and unlucky”.
After reading several posts about people speculating on LTD coverage, I thought I’d better get writing.
Getting Started - Determining Your Resources
Before purchasing an individual long-term disability income insurance policy, evaluate the benefits you may already be eligible to receive from your employer, the government, or other programs.
Employee Benefits
Disability benefits from your employer may include workers’ compensation insurance for work-related injuries. For short-term illness, your employer may provide sick leave, short-term disability insurance, or both. For a longer illness, lasting six months or more, your employer may provide group long-term disability income insurance.
Sick leave and short-term disability coverage from your employer can range from a few days to as much as a year, depending on your company’s benefits and your length of employment.
Group long-term disability coverage through employers replaces part of your salary if you are disabled and unable to work. A typical policy replaces at least half of your salary up to a specific maximum benefit, such as $5,000 per month. Long-term benefits begin when short-term disability benefits stop. Benefits from group long-term disability policies generally continue until either age 65 or your retirement age under Social Security, or until you are able to return to work. In some policies, benefits may also be available for a period of time after you return to work.
Social Security Benefits
Social Security provides long-term disability benefits based on your salary and the number of years you have worked and contributed to the Social Security system. However, Social Security replaces only a limited portion of your salary, and the qualifications to receive benefits are very strict. To be eligible for Social Security disability benefits, all of these conditions must be met:
- You have been disabled for five full calendar months.
- Your disability is expected to last at least 12 months or end in death.
- You are unable to be gainfully employed at any occupation, not just your occupation at the time your disability began.
Other Resources
Other programs besides Social Security aid those who have become disabled. You may qualify for:
- Workers’ compensation for work-related injuries or illnesses, required in all states.
- Special disability programs for veterans injured in war, federal and state government workers, railroad employees, or miners who develop black lung disease.
- State vocational rehabilitation programs.
- Automobile insurance benefits for a disability resulting from an auto accident.
- Temporary disability programs available in California, New York, New Jersey, Rhode Island, Hawaii, and Puerto Rico.
Long-term disability income insurance provides financial protection if you become disabled. It helps pay current bills so that savings accumulated for your children’s education or your retirement can remain intact.
Knowing your eligibility for disability benefits from your employer, the government, or other programs is an important first step before deciding whether to purchase disability income coverage. Also take into account other sources of income that may be available to you: a spouse’s income, short-term emergency savings, investment income, or help from your family.
If the total of these benefits is insufficient to pay your living expenses if you become disabled, or a disability would affect your long-term savings plan, consider buying an individual disability income insurance policy.
Examining Policies
Features of Disability Income Insurance
Not all individual disability income insurance policies are alike. Consider these features when comparing policies:
Some policies pay benefits if you are unable to perform the duties of any occupation for which you are reasonably qualified by training, experience, and education. For instance a surgeon who cannot perform surgery may be able to teach medicine in a classroom. Other policies pay benefits if you are unable to perform the major duties of your own occupation. Many policies combine these features, providing “own occupation” coverage for an initial period, such as one or two years, and “any occupation” coverage after that. Some policies also pay benefits if you become ill or injured and are unable to earn a specified amount, such as 80 percent or less, of your income.
The amount of income you would receive when disabled varies by policy. However, benefits from all sources are usually limited to 70-80 percent of your monthly salary. Policies that pay 50-60 percent of salary are most common. Most policies do not replace commission or bonus income.
If you purchase your own policy, your disability benefits typically are not subject to income taxes. Benefits are taxed, however, if your employer pays for the disability insurance coverage.
Policies have either level premiums (intended to stay constant over the life of the policy) or premiums that increase as you age. If you plan to keep your policy in force long-term, a level premium policy may be appropriate. If you are uncertain about how long you will need the insurance, a policy with premiums that
increase with age may be the better choice.
Policies have different waiting periods (called elimination periods) before you begin receiving benefits. You can lower the premiums you pay by waiting 90 days, six months, or even longer before starting to receive benefits.
If you go back to work after recovering from a disability and suffer a relapse within a specific period of time, such as six months, most policies do not impose a second waiting period.
The length of time that benefits can be received varies by policy. Some individual policies pay benefits for a specified period of time, such as two or five years, while others pay benefits until age 65 or your retirement age under Social Security.
Some policies require total disability before payment begins, while other policies cover partial disability.
Some policies pay “residual” benefits. These benefits make up for any loss of income if you are still able to work but your disability keeps you from performing all of your normal responsibilities.
Under some policies, the insurer pays for job training or other assistance you may need to return to work, such as modifications to your work environment.
Some policies offer cost-of-living adjustments in the amount paid to the insured as an optional benefit.
Most individual policies are either noncancellable or guaranteed renewable. With a noncancellable policy, premiums can never be increased. Under a guaranteed renewable policy, premiums cannot be raised based on an individual’s circumstances, but they can be increased for an entire class of policyholders. A guaranteed renewable policy may define how a class is determined for example, all policyholders in a state who own the same type of policy might constitute one class. Ask about the circumstances under which premiums can be raised and how classes are defined.
Most companies review an individual’s medical and financial history and consider any other disability coverage that person has before issuing a policy. Based on this information, an insurer may offer limited or modified coverage.
Next post - Rating Factors and shopping for a policy
couldn’t agree more - that’s why I got supplemental disability on top of my company policy.