Disability Income Insurance: What You Should Know

What You Should Know About Disability Insurance

I Need to Know...

It's probably hard to imagine yourself so disabled you can't work. But statistically, you're much more likely to become disabled before age 65 than you are to die. If you're like most people without an earned income, you'd find it very hard to make your mortgage payments.

Disability Insurance Overview

Your chance of becoming disabled is greater than you probably realize
Its a sobering fact: If you are under 65, your chance of becoming disabled for 90 days or longer is twice as likely as your chance of dying. If you were unable to work for a few weeks, months or even years, would you be able to maintain your mortgage payments? What about all of the other expenses related to owning a home, like homeowner's insurance, property taxes, maintenance and utility bills?

Thinking Social Security? You may want to think again…
Social Security doesn't provide adequate coverage, in most cases. Social Security does pay some disability benefits -- but qualifying for them is much harder than most people realize. Social Security typically pays disability benefits only if you are diagnosed with a fatal illness, or if your physical or mental disability makes you unable to do any kind of work for at least 12 months. Even then, you won't receive any Social Security payments for the first six months after you become disabled. That's not much of a safety net. You'd have a great deal more protection with your own disability insurance policy.

Your disability benefits could be tax-free
Usually, if you pay for disability insurance with after-tax dollars, any benefits you receive will be tax-free. Since taxes won't be taken out of your disability checks, you don't need to replace 100% of your gross income. (That's good, because insurers don't sell policies that replace 100% of your income; most disability coverage replaces only up to 60% - 70% of your gross income because insurance companies want you to be motivated to get well and return to work). To figure out how much disability coverage you need, calculate your monthly living expenses, starting with your mortgage payment and related house expenses.

Frequently Asked Questions About Disability Insurance . . .

What is Disability Income Insurance?

A disability income insurance policy is a contract between you and an insurance company. You pay a periodic premium, and in exchange the insurance company promises that if you cannot work because you are disabled, it will pay you a percentage of your lost income.

Do you need it?

Although many people own life insurance because they're aware of the risk of dying, most people ignore the risk of disability. Yet in fact, disability is a greater risk for young people: between the ages of 25 and 55, you're more than twice as likely to become disabled as you are to die. Think for a moment about the financial impact on your life if you were unable to work. Could you live without your salary for six months, a year -- perhaps longer? If not, you need disability income insurance.

What determines if you are disabled?

The policy's definition of disability is what determines whether or not you are eligible for benefit payments. The policies that provide the broadest coverage define disability as your inability to perform the duties required by your own occupation. A brain surgeon with this type of policy would receive benefits if he couldn't perform surgery, for example, even if he could earn a living as a medical school professor. The policies that provide the narrowest coverage define disability as your inability to work in any job at all. Of course, the broader the coverage, the more expensive the policy.

How much do you need?

Insurance companies don't sell disability policies that replace 100 percent of your salary. If they did, they fear you'd have no economic incentive to go back to work! Expect to find coverage available for 60 to 70 percent of your income. Unless you have substantial other sources of income -- from an investment portfolio, for example -- it makes sense to buy as much coverage as you can afford.

What special policy features are available?

CPI cost of living adjustments - This option guarantees that after a year of continuous disability, your benefit amount will increase by an amount pegged to the increase in the Consumer Price Index.
Automatic increase in benefits - This option provides for a specific increase in benefits for a specified period of time, such as three percent a year for five years.
Guaranteed insurability - This option allows you to buy additional monthly benefits without having to provide evidence of your continued good health. It's a way of ensuring that your coverage keeps pace with your rising income and financial obligations.

What affects your rates?

Benefit period - A policy that pays lifetime benefits will be more expensive than a policy that provides benefits for a limited period of time, such as to age 65, or for 5 years.
Amount of benefit - The greater the benefit, the higher your premium will be.
Waiting period - This is the delay between the onset of disability and the first benefit payment. Waiting periods longer than 90 days will reduce your premium costs.
Definition of disability - The more restrictive the definition of disability used in your policy, the lower the cost.
Features - Inflation riders, return of premium provisions and other options may be nice, but if their cost puts a policy beyond your budget, stick to the basics - the most important thing is to make sure you have a policy you can afford to maintain.

How can you get disability income insurance?

How MWBoone & Associates can help you with your insurance needs . . .

Disability Income Insurance

Disability income insurance pays you a monthly benefit to replace a percentage of your income if you're disabled and therefore unable to work.

What it does:

It protects your most valuable single asset: your ability to earn an income. If you are 45 years old and earn $100,000 per year you will likely earn nearly $3,000,000 before retirement. Doesn't it make sense to insure a portion of that income?
It lets you tailor the cost and terms of the policy to fit your own budget and needs, by allowing you to choose how long you'll wait after becoming disabled for benefit payments to begin, and how long the payments will last.

What it doesn't do:

It doesn't replace your entire paycheck. Most policies will only cover up to 60% or 70% of your salary.
It doesn't pay benefits under any and all circumstances. Policies include a specific definition of "disabled" which you must meet in order to qualify for benefit payments.

What we add to the process:

We will spend time determining the proper coverage and coverage amount for you. Your disability coverage is only as good as the company insuring you. We carefully review the financial stability of the carrier and the industry reputation.

Our analysis of disability policies includes:
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--the product's renewability provision.
--the minimum and maximum issue ages.
--whether the policy is renewable after age 65.
--the product's definition of total disability.
--the periods in which own occupation coverage is available.
--whether own occupation coverage is available on a specialty basis.
--how residual disability is defined.
--whether residual benefits are available in the event of partial disability.
--whether there is a provision with respect to presumptive disability.
--under what condition the premium is waived.
--elimination and benefit periods that are available.
--the occupational classes for which the product is intended.
--whether a social insurance supplement is available in the event of non- acceptance for Social Security.
--whether a business overhead expense option is available.

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