Are You Better Prepared for Disability or Death?

Chances are you're probably covered by some sort of life insurance plan to protect your family and assets in case of accidental death, but what about disability? Since many people rely heavily on their current earnings for support, disability income insurance is one of the most important coverages you can buy. Your ability to pay for basic necessities such as food and housing would be seriously jeopardized if you suddenly become disabled. Yet surprisingly, many people have little to no insurance to protect them if faced with such a situation.

One reason for the lack of coverage could be the cost. The fact is, disability insurance can be expensive. Many people purchase group policies, which cost considerably less than individual policies but often provide less comprehensive coverage. It's the old adage "you get what you pay for." In the long run, low-cost coverage is more expensive if a disability from an accident or sickness is not covered or the benefits run out.

To be adequately covered, most experts agree that you'll need at least 60% of your gross income for as long as you can't work. (Most people pay for their disability coverage with after-tax dollars, so any benefits received are tax-free. Hence, disability protection that provides 60 to 70% of pre-tax income is usually sufficient.) When comparing policies, the definition of disability can make all the difference in the amount of protection offered:

• Total and permanent disability.
• Total disability, not permanent, that prevents you from performing the duties of any occupation.
• Total disability, not permanent, that could force you out of your occupation and into another.
• Total disability followed by partial disability.
• Partial disability that progresses into total disability.
• Short-term disability that could be total or partial.
• Full physical recovery after disability but not full financial recovery. 

Some policies will pay only if you can't work—total disability. The key is to find one that will also pay if you have a loss of income due to disability. A policy that has partial disability protection allows you to collect benefits even while working part-time—though beware of policies that require you to be totally disabled for a specified time period first. This protects you if you develop a degenerative disease that leads to partial disability and progresses into total disability.

The most comprehensive policies are non-cancelable and guaranteed renewable. This means the insurance company can't refuse to renew your policy if your health fails and can't raise your premium until age 65. It costs more, but it's well worth the price. It is important to look for an inflation rider that increases your monthly benefit with the cost-of-living during a period of disability (usually determined by the Consumer Price Index). In addition, look for future insurability, which allows you to increase your coverage regardless of changes in your health, activities or occupation. Keep in mind the new policy will be subject to the financial insurability standards of the insurance company.

Some companies also have transition benefits that help cover your financial loss even though you're no longer disabled. For instance, say you were out for eight months due to a heart attack. When you return, your income is down 30% because some customers have gone elsewhere. Many policies will pay a benefit proportionate to your loss of income, so if you're down 30%, you'll receive 30% of your benefit.

Once you've decided what type of policy you need, there are other features to consider that can affect your costs. One is the beginning date, or the delay you're willing to wait until benefit payments begin. The longer the wait, the less expensive the policy. Most planners recommend a 90-day period, which means benefits would begin four months after disability (90 days to begin, plus the 30 days for the insurer to issue the first check). By living off savings for four months, you can significantly reduce the cost of your disability policy.

Another decision to make is the maximum benefit period. You can buy a policy that will pay benefits for one, two or five years, until you reach age 65, or to age 70. The most common is to age 65, when retirement and pension income usually kick in.

Lastly, you need to determine how you want to pay for your policy. A level premium is a flat rate that remains the same for as long as you own the contract. A step-rate starts lower, but then jumps higher down the road. And an annually renewable (or renewable term rate) starts low, increasing each year. This benefit is relatively new and is becoming very popular among professionals because it's essentially a "pay-as-you-go" policy, much like term life insurance.

You only pay exactly what you should for the cost of the insurance at any given point in time. So, people making little money can pay lower premiums, but as their incomes increase, they may have an opportunity to convert to a level premium depending on the type of contract they purchase. The cost of the coverage will be based on their newly attained age.

Obviously, there's a lot to consider when buying disability income insurance. Although you may feel you're adequately covered by your group plan, take some time to really look into the policy. One difference between individual and group plans is that an individual policy may consider all forms of income, including bonuses, overtime, and pension contributions. Group plans usually only cover base salary. If you're covered by a group plan offered though a company or office, that coverage typically ends if you resign, whereas an individual policy remains with you. Also, group premiums may go up as the group gets older, and the insurance company reserves the right to raise premiums or even cancel coverage as a whole.

So whether you buy individual disability income insurance as your sole protection against disability or as a supplement to your group coverage, the important thing is to make sure you're covered.

You must have good health and an income to purchase individual disability insurance, but if you wait until you need it, you may not qualify. Protect yourself now!

Source: The Northwestern Mutual Life Insurance Company