Volume 3, Issue 9
Disability Income Insurance: Protecting Your Most Valuable Asset
Have you ever wondered how you would manage financially if you were to experience a severe accident or illness that left you unable to work? How long could you maintain your quality of life, pay your bills, and cover your daily expenses? The likelihood of such an event may be greater than you think. According to the Insurance Information Institute (III, 2010), 43% of all people age 40 will have a long-term (lasting 90 days or more) disability event by age 65.
To be prepared for such a situation, it is important to plan ahead and be proactive. To help protect yourself, you may wish to purchase an individual disability income insurance policy. However, there are a few considerations to be aware of when choosing this coverage:
Definition of Disability. Carefully review your policy’s definition of disability. Some policies may provide coverage if you are unable to work in the occupation in which you were employed or for which you were trained, or if you can no longer earn as much as you once did in that field. In contrast, other policies may offer coverage only if you are unable to work in any occupation. Should you become disabled, this distinction can make a world of difference.
Residual Benefits or Partial Disability Coverage. Under certain specified circumstances, if you become disabled and are only able to earn a portion of your previous income, residual benefits or partial disability coverage pays a percentage of your benefits.
Guaranteed Renewable. With this feature, the insurer cannot refuse to renew your policy or change any terms, except for premium cost, as long as you continue to pay your premiums on time.
Guaranteed Insurability. This provision allows you to increase your monthly benefit, even if you experience health changes that would otherwise prevent you from obtaining additional disability coverage.
Cost-of-Living Adjustment (COLA). This feature helps protect your benefits against the effects of inflation during a long-term disability.
It is important to note that the cost of your disability income insurance policy will vary according to the scope of coverage you choose, and there may be an additional premium for adding any riders.
The Outlook without Protection
If you don’t have a disability income insurance policy, there are alternatives, although they all have shortcomings. For instance, you could self-insure. But, even if you save 10% of your salary each year, one year of disability could easily wipe out many years of savings. Or, perhaps your employer provides group disability insurance. Unfortunately, employer-sponsored plans are often limited in scope and duration, and coverage is not portable upon termination of employment (except in certain executive disability policies). Workers compensation may be an option in some cases; however, it only covers injuries that occurred on the job. Eligibility and benefits vary by state.
To qualify for Social Security disability benefits, specific criteria must be met, and you may have to wait several months for payments to begin. Social Security disability was not intended to be an individual’s sole source of disability income. Thus, benefits are often less than what is needed to cover living expenses.
A debilitating illness or injury that reduces or eliminates your primary source of income can be a financially devastating experience—one from which it can be difficult to recover. Disability income insurance can play an important role in your overall financial strategy.