Overlook Disability Insurance At Your Own Risk

By Richard A. McGrath, CIC, LIA

Suffering a disability is much more likely than being in an auto accident, dying or having a fire in your home, according to the Society of Actuaries.

Yet most of us own auto insurance, life insurance and homeowner’s insurance – and few people have disability insurance.

Every year, 12% of the adult population suffers a long-term disability, according to Unum, a disability insurance carrier.  Based on current statistics, Unum predicts that half of the population between ages 35 and 65 will be disabled for three months or longer, and that one out of every seven workers will suffer a disability that makes him or her unable to work for five-years or longer.

In spite of these odds, fewer than a third of employees are covered by disability insurance, according to the American Council of Life Insurers.

What would happen to your family if you were out of work for five years?  Or even for three months?  If your family relies on your income, it may be worth considering disability coverage, which is designed to replace a person’s income when the person is unable to work because of a disability, such as an illness or an injury.

Even if you have disability coverage, it may be worth reviewing your coverage to ensure that it provides you with the protection you need.  You may, for example, have group disability insurance through your workplace or through a trade association.  Such insurance is usually inexpensive, but it may not provide the level of coverage you need.

How Much Do You Need?

The cost of disability insurance varies widely based on factors such as aperson’s age at purchase, occupation, sex and health status.  Smokers and women will pay more, for example, because they have a higher likelihood of becoming disabled.  Insurance features also affect price, of course, including the type of contract, the length of the waiting period before coverage begins, how long the benefits period will last and the monthly dollar amount of coverage.

You can’t control your age or gender, but you can alter some of the features to make your coverage more affordable.  Begin by deciding which features are essential to you.  Insurance that fails to provide the protection your family needs is not worth buying, no matter how little it costs.

If you decide to purchase individual disability insurance, it is recommended that you purchase a policy that is non-cancelable and guaranteed renewable.  Such insurance cannot be canceled and can guarantee that your premiums will stay the same until age 65, after which you presumably will be retired and will not need insurance to replace your income.  Non-cancelable, guaranteed coverage may add to the cost, but disability insurance is worth having only if coverage is there when you need it.

As disability coverage will be needed long-term, it is especially important to buy disability insurance from an insurance company that is creditworthy and will have the financial means to pay any claims you may have.  Most insurers include their ratings on their Web site, but you can also check ratings at rating company sites, such as A.M. Best (http://www.ambest.com/) and Standard & Poor’s (standardandpoors.com).

Once you’ve decided to purchase disability insurance, consider what percentage of your income you would need to live on.  Most disability insurance replaces at least 60 percent of gross income, but if you want to continue your current lifestyle, it’s best to purchase coverage that will replace at least 80 percent of your income.  Of course, the higher the percentage, the higher your premiums will be.

Also consider whether you will need coverage if you are able to return to work parttime or in a different job.  Some policies provide coverage for partial disabilities and others do not.  Highly skilled professionals often seek “own occupation” coverage, which provides them with full benefits if they are unable to work in their chosen occupation, even if they are fit for other work.  Such coverage is expensive and is no longer widely offered.

How long the policy will pay benefits is also important to consider.  While most disabilities last less than 90 days, many last for years and some are permanent.  It is typically worth purchasing coverage that extends benefits to age 65.  Remember that the purpose of disability insurance is to be able to support your family; if your coverage provides only short-term benefits and your disability lasts longer than the coverage period, you could run out of money.

One way to reduce premiums is to extend the waiting period before coverage begins.  A 90-day waiting period is typical, but whatever the waiting period, you should have sufficient savings to cover your expenses.  Some policies allow employees to return to work for periods of time without being subject to a new waiting period.

Most plans waive premiums when a person is disabled and some continue coverage past age 65 if a person is still working.  All options should be reviewed and chosen based on individual needs and budgetary considerations.

As with life insurance, eligibility requirements for disability insurance are strict.  You must prove you are in good health and you will probably be asked to verify your income.  Pre-existing conditions may increase premiums or be excluded from coverage.

Also be certain to have your agent review the policy’s definition of total and partial disability, which is also known as “residual” disability.  Have your agent review any exclusion clauses, renewability terms and optional riders, such as cost-of-living adjustments.

Regardless of the policy and options chosen, review your policy regularly with your insurance agent to ensure that it reflects any changes in income or employment status.

Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass.  He can be reached at rmcgrath@mcgrathinsurance.com.

This article is written for informational purposes only and should not be construed as providing legal advice.