The Risk That Everyone Forgets
You insure your house, your car, even your
old couches and chairs. But you forget your
single biggest asset: your earning power.
You plot. You plan. You save. You invest. Then you fall off a roof (or your spouse does), wind up in a wheelchair, and your entire financial plan falls apart. You go through your savings like a buzz saw. Your comfortable standard of living goes down the drain.
All because you forgot to insure your earning power, which is your most valuable single asset. If you’re sick, you have health insurance. If you die, your family can cash in your life insurance policy. But disability falls between the cracks. You’re alive—in a bed or a wheelchair—and have no money coming in. You need disability insurance, which sends you a check when you can’t work.
Are you just about ready to skip this chapter because you can’t afford to buy? Not so fast! There are new kinds of policies today, more reasonably priced than the old ones were. Coverage is also streaming into the workplace, where employees can buy for one-third the price of individual insurance and without passing a health exam.
For single people, not rich, disability coverage is a must. You have no spouse to support you if you can’t work and don’t have an independent income. Buy for sure if there are inheritable, disabling diseases in your family, such as cystic fibrosis or multiple sclerosis.
Whether married people need disability coverage depends on each spouse’s income and assets. If you had no paycheck, could your spouse’s salary support the family, including the extra costs of your disability (home care or more physical therapy than your insurance will pay for)? Are you certain that your spouse could keep working rather than tending to you? Alternatively, could you live on your savings for many years? If so, you don’t need the insurance. If not, you need it badly. In many two-paycheck families, husband and wife should each carry a policy. There are policies specifically for nonworking spouses if there’s no spouse rider on your group policy.
It pays you a monthly income if, due to illness or accident, you’re not able to hold a suitable job. The younger you are, the lower the premium you pay.
You insure for a specified dollar amount, such as $2,000 or $3,000 a month. The checks typically last until age 65 but can stop earlier or later, depending on the policy. If you buy new coverage after 60, you’re usually entitled to benefits for only three to five years.
Younger people should increase their coverage as their incomes rise. The price of each addition depends on your age at the time. A health check will be required unless you bought a rider letting you forgo it. When looking for more coverage, check your current company first. It’s also more efficient to deal with a single company’s claims department. If you’re offered a much better deal by another insurer, however, take it.
When you’re not in excellent health (a “rated risk”), your insurance will cost you more—if you can buy it at all. On policies bought outside the workplace, underwriting is pretty strict. Here’s where there’s no substitute for an experienced, energetic agent. Some insurers are less restrictive than others. The agent should try several companies to see what kind of deal you can get.
There are many variations to disability coverage, as will be explained. Shoot for coverage that—together with any other corporate or government benefits—gives you a minimally acceptable income. If you have extra money to spend, put it into savings and investments rather than super-rich disability benefits. You’re more likely to retire healthy than retire sick.
Almost every worker has a source of at least some disability pay:
There’s Workers Compensation, for work-related injuries. Disability payments vary widely from state to state. The maximum is 66.6 percent of your pre-disability gross wages or 80 percent of your take-home pay, up to a specified ceiling. Employers buy workers comp for their employees; the self-employed have to buy their own.
There’s Social Security Disability Insurace, if you worked long enough to be eligible for coverage or are eligible on your spouse’s account. But you have to be so pulverized, physically or mentally, that you cannot work in any substantial job (there’s a limited exception for the blind). Your checks don’t start until you’ve been disabled for five full months. Furthermore, your doctor has to expect your disability to last for at least a year or to end in your death.
Social Security applies these rules strictly, sometimes too strictly. You may have to appeal (ideally, with the help of a lawyer) to collect the benefit truly due you. About two-thirds of those who apply for benefits are turned down the first time they apply, generally because they’re judged fit for some kind of work. Of those who appeal and whose cases are reviewed by the Social Security Appeals Council, however, nearly two-thirds are accepted. If you carry a private disability policy, the insurance company may pay the legal costs of challenging a turndown. Anything you get from Social Security usually reduces the monthly amount that your private insurer pays.
To find out what benefit you and your dependents can expect to collect, see page 1096. Beneficiaries get annual cost-of-living increases, which protect their purchasing power. After 24 months on Social Security disability, you qualify for Medicare.
There’s Veterans Insurance, if you can trace your ailment to something that happened while you were on active duty with the armed forces. Low-income veterans who are totally disabled and who served during periods designated as wartime can get benefits even for disabilities that are not service related.
There Are Disability Funds in Several States, including California, Hawaii, New Jersey, New York, and Rhode Island, plus Puerto Rico. They pay sickness benefits for a limited number of weeks to people disabled off the job.
There’s Employer-Paid Coverage, generally limited to large and medium-size companies. You may get short-term sick pay and long-term disability pay at no cost to you, you lucky duck.
Disability insurers have discovered America. Previously, they sold principally to business executives and high-earning professionals. Now they’re noticing everyone else: middle managers, midlevel professionals, small-business owners and employees, technicians, skilled clerical and white-collar workers, gray-collar workers in high-tech manufacturing plants—the vast middle market that needs disability coverage too.
This new group, however, can’t afford the fancy individual policies that doctors and lawyers buy. So the trend today is toward stripped-down coverage sold through the workplace, where it can be delivered at a lower cost. Your premium rises as you age. A ballpark price might be $20 to $25 a month for someone in his or her mid-30s buying a disability policy worth $1,500 a month. In your mid-40s, you might be charged $30 to $35. Women and men are charged the same. That makes it a great buy for women, who would otherwise pay much more for their coverage than men. Some large employers provide this coverage free.
Workplace disability insurance, including unisex pricing, is available for groups as small as three, as long as they work in the same location. There are four ways that coverage might be delivered:
1. The company pays for everything.
2. The employer offers the plan but employees buy the coverage themselves through payroll deduction. Everyone in a given age range is charged the same.
3. The employer gives everyone a basic benefit regardless of health—usually covering 50 percent of the worker’s pay. Workers have the option of covering another 10 or 15 percent of their pay at their own expense. To buy these supplements, you may have to pass a health exam.
4. The employer adds disability pay to a pick-your-own benefits plan. Employees receive a fixed number of credits and use them to choose the benefits they want. Some plans offer two levels of disability coverage. You can insure for either 50 or 70 percent of pay. The higher amount is available no matter how much disability coverage you have outside the company plan.
In big firms, you usually don’t have to pass a health exam if you sign up for coverage as soon as you join the company. You will be examined, however, if you apply at a later date. If you’re found to have a health problem, the company might turn you down. Alternatively, your policy might contain an exclusion for a disability caused by the illness you’re known to have.
In all these plans, you probably won’t be covered immediately for preexisting conditions, defined as ailments you’ve known about during the past 3 or 6 months. Benefits generally don’t start until you’ve been free of that problem for at least 12 months.
Some employers offer short-term disability (“sick pay”) for 3 to 12 months. The payments vary widely—maybe 100 percent of pay for 2 months, then 60 percent for the rest of the period. Maybe 75 percent of pay for 6 months. It all depends on what the company chose for its plan.
If you’re sick longer, you’ll qualify for long-term disability, often payable until you’re 65. Typically, you get a fixed percentage of salary, up to a cap of perhaps $8,000 to $10,000 a month (this calculation may or may not include your bonuses and commissions). Your disability income will be reduced by certain other payments, including Social Security, workers compensation, and any pension that your company pays. There may be partial benefits if, despite your disability, you’re still able to work part-time.
Here’s what to expect from quality plans: coverage for both injury and illness to age 65; coverage for both total disability, when you cannot work at all, and partial disability if you can work part-time.
Here’s what you might get from lesser plans: coverage only for total disability. If partial disability is included, it might last for only a few months. You might be covered to age 65 after an accident but only two to five years after a disabling illness. Even so, limited, affordable coverage is better than no coverage at all.
Your company might offer group disability coverage or individual plans. Group coverage usually isn’t portable, meaning that you can’t keep it if you leave your job. A few plans let you convert from the group to an individual policy with the same insurer. But conversion policies offer limited benefits at a humongous price. You’d buy one only if you were otherwise uninsurable.
Ideally, your company will offer individual coverage or an individual policy that supplements your group insurance. Individual policies cost more than group plans, but they’re fully portable. You can take them with you when you change jobs, at the same price you were paying before (or perhaps just a little bit more). This lets you continue your protection, at what’s still a bargain price, often to age 65. You don’t have to worry that your next job might not offer disability coverage; or that your next group policy might not cover you for 12 months; or that you might become uninsurable; or that you can’t get coverage because you’re self-employed; or that you might be unemployed for a while. Your old workplace policy will carry you through. If yours was a supplemental policy, coverage can usually be increased.
Portability isn’t always perfect. Some insurers don’t allow you to keep the coverage if your employer switches to another group insurer. Some terminate if you’re eligible for another employer’s plan, even if it’s not as good as the one you have.
If your workplace plan isn’t portable or you think its benefits are poor, use the information starting on page 494 to price an outside policy. It will cost you more, but you’ll have it regardless of what becomes of your job or health. You can also buy partial-disability coverage if your workplace insurance pays only when you’re totally disabled. Don’t fail to take the workplace coverage, however, if outside policies are too expensive.
If you’re disabled, go over your plan with a magnifying glass. You don’t want to lose benefits by violating some technical provision. Will the plan pay if you work part-time before switching to total disability? Will it resume payments if you return to work and find that you can no longer handle the job? What exactly is the definition of disability?
Another source of cut-rate disability coverage is a trade or professional association. Some policies take everyone; others screen out only the worst risks (people with HIV, cancer, or a history of heart attacks); others screen for additional health or working conditions. Premiums increase as you age.
How much you pay may be linked to your health when you first apply. It may also depend on whether your association offers a group or individual policy. Those in mediocre health will typically pay more for individual coverage than for group.
Ask whether the coverage is portable (see the discussion on page 490). Some contracts let you keep your policy if you leave the association; others don’t.
Before buying association coverage, check its definition of disability. Sometimes the price is low because the policy doesn’t offer much. Also, talk to a disability insurance agent. You might be able to do better with an outside plan. It’s especially important to check the alternatives if your association offers coverage that isn’t portable.
A plus for some associations: they might insure members who work from home. Some associations, such as the Freelancers Union (www.freelancers union.org), specialize in insurance and other services for home-based entrepreneurs. Group coverage at large associations usually charges unisex rates, which makes the policies especially cheap for women. Individual policies charge women more.
This is coverage that you buy yourself, without employer sponsorship. It might be your only coverage, or it might supplement employer coverage. Individual policies are sold by insurance agents and are generally more comprehensive than workplace or association insurance. Translation: they’re expensive. Prices vary tremendously, depending on the insurance company and the benefits you choose. A man in his mid-30s might pay $35 to $44 a month for every $1,000 of disability income he buys. In his mid-40s, he might be charged $57 to $71. Women in that age range might pay from 30 to 50 percent more. (It’s no surprise that most policies are sold to men!) Unlike workplace insurance, premiums on individual disability policies don’t rise as you age.
Until the early 1990s, agents concentrated on selling cushy, Cadillac coverage to business executives and professionals. But nowadays, leaner policies are coming on line for people who don’t want to spend as much.
How much you personally would pay depends not only on your age but also on your health, your sex, the state you live in, the insurer you choose, the benefits you want, your smoking history, and your job. The lower your occupational risk (based on industry claims data), the lower your cost and the better your benefits may be.
The lowest prices go to people with clean-hands jobs such as college professors and accountants. Their illness and accident risk is low. When disabled, they’re usually eager to recover and get back to work. Retiring on disability pay would bore them stiff.
Some clerical workers, by contrast, aren’t offered affordable individual coverage because, when disabled, they may not be motivated to return to their jobs. Blue-collar workers have two strikes against them: presumed low motivation and the increased risk of industrial accidents.
For a general idea of how risky a client you’re thought to be, check the sample classifications below. If you’re in class 5, you might pay as much as 20 percent less than if you land in Class 4. So ask your agent to show you alternatives from the top companies. Different companies reach different conclusions about where a particular job belongs.
Individual disability insurance is sold to classes 5, 4, and 3. For the rest, individual coverage is effectively unaffordable.
Class 5. Big-business executives; selected professionals, such as accountants, architects, lawyers, pharmacists, and college professors.
Class 4. Doctors, dentists, technicians, and selected middle management. Most insurers have dropped doctors with invasive or surgical practices to class 3.
Class 3. Surgeons, small-business management, white-collar and selected gray-collar workers, supervisors, skilled clerical and technical workers, real estate agents, and teachers.
Class 2. Sales clerks, unskilled clerical workers, barbers, and pink- and blue-collar workers whose jobs involve some manual labor.
Classes A and B. The all-but-untouchables: skilled workers in risky jobs (carpenters, bricklayers) and workers in heavy-lifting jobs (porters, baggage handlers).
If You’re Self-Employed and Work at Home. Almost all carriers offer comprehensive policies to self-employed people who work at home if they go to client locations or have clients visit them at their home offices some of the time. A few will offer it even if you don’t leave the home on a regular basis for work.
If You’re Uninsurable. You might want to accept the package of life and disability insurance that comes with credit cards, auto loans, personal loans, and mortgages. That coverage is pocked with exclusions (read the fine print; page 351), but it’s better than nothing.
If You’re Female. You’re at a big disadvantage. Women make more claims than men (for example—surprise, surprise—pregnancy-related claims), so they’re charged higher premiums by insurers that establish rates by sex. At 30, you might pay 60 percent more than a man of the same age; at 40, it might be 40 percent more; at 50 (postpregnancy), 25 percent more. A few companies charge unisex rates, which give women a break. Ask your insurance agent to find them. Workplace and some association plans also offer unisex pricing. (In Montana, unisex pricing is mandatory for all insurers doing business there.)
You need enough insurance to feel that you and your family would be okay if you couldn’t work. You’re shooting for a decent standard of living—not grand but decent.
To put that into dollars and cents, go back to page 21, where you figured how much money you’d have in the kitty if you became disabled. (What? You skipped that calculation? This proves my point about needing insurance: you never know when you’ll get caught.)
Estimate how much monthly income your kitty might throw off. Add that to your other sources of income, such as spouse’s earnings, company-paid disability benefits, and Social Security. If that’s not enough to pay your bills, including the extra expenses connected with being disabled, fill as much of the gap as you can with disability coverage from your company or an insurance agent.
Insurers won’t knowingly sell you a large enough policy to replace all your income. That destroys your incentive to work. Instead they’ll restrict your coverage to a portion of what you earn. A person earning $500,000 might be able to replace less than 40 percent of his or her earnings with insurance benefits. At $60,000 in income, you’d be able to replace nearly 70 percent. Your effective income is higher, however, because these benefits aren’t taxable (page 500).
What if you go for 100 percent coverage by buying individual policies from two different insurance companies? You won’t get away with it. Insurers always ask whether you have any other coverage, so you’d have to lie. To test your truthfulness, they can run your name through the Medical Information Bureau (page 483), which keeps track of the policies you apply for. They also can telephone your employer.
What if you try to get extra coverage by overstating your income? The insurers will ask for your tax returns. You’ll be offered only the amount of insurance you qualify for.
What if you’re currently overinsured but only because your income dropped? Your insurer probably won’t pay more than 100 percent of your previous earnings. Your benefit would be scaled back and some of your premiums returned. One exception: if the policy is noncancelable, it will pay the specified monthly benefits regardless of your current earnings.
What if you’re overinsured because you added a big workplace policy to a preexisting individual policy? The insurers might pay even if your total coverage comes to more than 100 percent of your pay. More likely, your group plan will pay you less, so your disability income won’t exceed what you earned before your illness or accident.
Your budget for disability insurance is probably limited, so weigh all the following options carefully. You’re not looking for bells and whistles. The objective is a policy that meets your reasonable needs—no less, no more.
Fixed Premiums Versus Rising Premiums. An excellent buy for people on a limited budget is an annually renewable disability income (ARDI) policy. It works very much like yearly term life insurance. The premium starts low and increases a little every year. By contrast, a traditional disability policy charges more when you first buy but fixes that price for the policy’s entire term.
ARDI makes sense for younger professionals and businesspeople who in the past may have felt that they couldn’t afford disability policies. Depending on your age, you might cut 25 to 50 percent off your initial cost.
Your gamble is that, as the price of the policy rises, so will your income. That’s a pretty good bet. ARDI’s modest extra cost each year shouldn’t be a strain. In early middle age, however, ARDI starts getting pretty expensive. You’ll want to drop the policy or convert to fixed-price coverage. If you’re insurable, don’t convert without checking out the competition. Another insurer may offer you a better price.
A few insurers offer step rates—lower rates in the first few years, when your earnings are low, then a jump to a single, higher rate in later years. Step-rate policies cost more than ARDI at the start but less as the policy ages.
Noncancelable Versus Guaranteed Renewable. Noncancelable is a comforting word. It means that your policy’s benefits can’t change, premiums can’t rise, and the company can’t cancel it. It’s renewable every year on exactly the same terms.
Most companies no longer offer noncancelable insurance or offer it with more limited benefits than they used to. Instead they’re pushing guaranteed renewable coverage. Here your benefits can’t change, but the company can raise the premium—not on your policy individually but on the entire policy class.
Guaranteed renewable policies cost 10 to 20 percent less than comparable noncancelable coverage, but you’re taking a price risk. If claims are higher than projected, the insurers can ask the state regulators for a premium increase—and they’d doubtlessly get it. Insurers could even manufacture the grounds for a premium increase if they wanted their older—hence riskier—policyholders to drop out (see “The Death Spiral,” page 445).
Shorter Term Versus Longer Term. Policies that pay benefits for just two or five years are inexpensive and will cover a lot of grief. But what if you’re one of the unlucky 14 percent who become disabled for five years or more? You and your family need protection against the very worst that can happen, so try to arrange for payments right to age 65—at which point you’d pick up Social Security retirement pay and maybe a pension. (If you’re already on Social Security disability, you’re switched to its retirement program at 65 with no change of benefit.)
A few insurers offer policies that pay benefits for life if you’re disabled anytime up to age 65 or 70. But you pay through the nose. Lifetime benefits are strictly a luxury buy for people with a high current income who aren’t saving much of it. They’d be smarter to put their extra money toward retirement savings instead.
In real life, many people cancel their disability insurance earlier than 65. They may retire early. Or they may accumulate enough net worth to guarantee an income even if they couldn’t work, which means they no longer need disability coverage.
Depending on your purse and your occupation, you might not be able to get coverage to age 65. In that case, take the longest period available or that you can afford. Even a five-year policy is better than nothing.
Don’t keep paying disability premiums after you retire. It’s a waste of money. Consider long-term care coverage instead.
If you’re still working after 65 and in good health, you might be able to renew your coverage to age 70 or longer, but at a high price. It’s probably not worth it.
High Benefits Versus Low Benefits. Don’t save money by buying less disability income than you actually need. The policy either supports you when you can’t work or it doesn’t—and if it doesn’t, your financial plan isn’t worth a tinker’s damn.
Insurers set a maximum that they’ll cover you for. The more you make, the lower the percentage of income they’ll provide. Some companies offer higher maximums than others, so ask your insurance agent to shop around.
If you have substantial income from interest, dividends, and capital gains, you won’t be able to buy as much disability insurance. The rules on this point vary from company to company. Some might restrict your coverage if your unearned income exceeds 10 percent of your earnings. Others reduce your eligible earnings by up to $30,000 in unearned income. The working rich can’t buy disability insurance at all. They don’t need it. They’ll live on their capital if they have to quit going to the office.
What if you can’t afford as much coverage as you need, all the way to 65? Insurers recommend that you buy the monthly benefit you require for as many years as you can.
“Own Occ” Versus “Any Occ” Versus Income Replacement. Here we come to the all-important definition of “disabled.” What are the terms under which your policy pays?
Some pay if you can’t perform the duties of your own occupation (“own occ”). For example, a surgeon becomes disabled if he or she loses a finger. Traditional own-occ policies pay full benefits even if you take up another line of work. A nine-fingered ex-surgeon could collect disability even while holding a full-time administrative job at an HMO. These “double-dip” policies, however, are going the way of the dodo. More common (and less costly) own-occ coverage says that, if you can’t work in your own occupation but choose to try another, the income you earn will be considered in calculating the size of your benefit. But you aren’t required to retrain if you’d rather not. To strengthen your claim to benefits, define your occupation in as much detail as you can.
An “any-occ” policy pays only if you can’t work at any occupation that reasonably fits your education, experience, and training (with a similar income level implied). If a nine-fingered surgeon is well enough to hold an administrative post at an HMO, he would no longer be considered disabled. The checks would stop whether or not he found a job. That’s a big weakness in this type of coverage. You’re subject to the judgment of the insurance company. Many policies combine these two definitions, giving you own-occ coverage for the first two to five years, then switching you to “any occ.”
An income-replacement policy insures your income rather than your occupation. This is generally the most cost-efficient choice. You’re covered for a certain level of income. If you can’t work at all, you get your full insured benefit. If you can work at your own job part-time or handle a lower-paying job for which you are reasonably suited, your policy pays the percentage difference between your lower earnings and your insured benefit. As an example, say that you’re earning 60 percent of what you did before. Your policy will pay 40 percent of your disability benefit. That protects the insured portion of your income, regardless of what job you hold. With an income replacement policy, the insurer can’t cut off your checks if you choose not to take up another line of work.
Income replacement won’t pay a business owner who keeps on receiving an income even if he or she is unable to work. On the other hand, the policy continues to pay if you’re a fee-paid professional who returns to work but can’t rebuild a client list immediately. (In the latter case, an own-occ policy could also help if it has good transition benefits—see page 500.)
What’s the best choice? Own-occ with residual benefits (see page 498) or income replacement. If your occupation is pretty general—say, business executive—own-occ coverage may not buy you anything extra. If you can’t function in your own occupation, you probably can’t function at all. In that case, income replacement would be the better choice.
Long Versus Short Elimination Period. This is the waiting period before benefits begin. The longer you’re willing to wait, the lower the premium you’ll pay. A one-month waiting period makes no sense; you’ll surely be able to cover your bills over so short a period. Instead consider any period between three and six months. A three-month wait might cut your insurance premium by 50 percent. A six-month wait cuts it by 60 percent.
Coordinate your coverage with any sick pay or short-term disability benefits that you’re entitled to. If your employer will pay short-term benefits for six months, your personal, long-term policy could pick up from there.
If your budget requires you to choose between a higher benefit and a longer waiting period, take the longer waiting period. You can always scramble for money over the short term. It’s the long term you have to worry about.
Do You Want Residual Benefits? Absolutely, with both an own-occ or any-occ policy. Without resid, these policies pay nothing if you’re able to work part-time. With resid, you’re paid if you’re still able to work but your illness or accident leaves you unfit for the schedule you kept before. Maybe you’re working only part-time. Maybe you had to switch to a less taxing, lower-paying job. Residual benefits help fill the gap between your old, high salary and your current one.
A true resid pays a pro rata portion of what you’re insured for, depending on how much money you earn. Say, for example, that your policy carries a maximum benefit of $4,000 a month. If, after a stroke, you can work part-time earning 60 percent of your previous income, you’d get 40 percent of your disability benefit, or $1,600. Resid also should pay if you never were totally disabled but were gradually overcome by an illness that put you partly out of commission.
Instead of resid, some policies pay what they call “partial” benefits. That might be 50 percent of your full disability benefit, regardless of how much you earn. But this payment usually doesn’t last very long, and you may be eligible only after a spell of total disability. A few policies pay partial benefits for a period of time, then switch to residual.
Many own-occ and any-occ insurers include this coverage automatically; others sell it separately, as a rider; a few don’t offer it at all. Depending on the company, you’re generally considered partly disabled if, because of your health, you lose more than 20 percent of your former income.
When you’re on resid, you’ll probably have to report your income every quarter (for those on straight salary) or perhaps every month (if your income varies), so the insurer can pay the proper percentage amount. Your insurer may also want to check your tax returns. If you have an income replacement policy, you also have to disclose your earnings periodically.
Some less expensive policies make fixed-dollar payments for partial disability—for example, $1,000 a month regardless of what you can earn. But these payments usually stop after 6 or 12 months.
Do You Want the Waiver of Premium? Yes, for sure. It lets you stop paying for your insurance if you become disabled. Most policies bundle it into your basic coverage, but sometimes you have to buy it separately.
In theory, you shouldn’t need a waiver. Your disability income should be large enough to cover all expenses, including your insurance premiums. In practice, however, waiver of premium is a surer thing. It’s especially important if you own a guaranteed renewable policy, the price of which could rise.
Do You Want Inflation Protection? Yes and maybe. Yes to predisability protection—built into some policies, sold separately with others. When sold separately, it’s generally an inexpensive option. Your insured amount rises by a certain percentage every year for a specified number of years. If you don’t want to pay for the increased amount in any given year, you can decline it. Once you’re disabled and start getting benefits, however, your payments are fixed.
Maybe to postdisability protection. This rider adds inflation protection to your disability benefit. Some insurers let you pick a fixed annual increase once you start receiving checks. Others link your payouts to the consumer price index. A built-in 3 percent increase might raise your premium by 10 percent. I call this a “maybe” because, although it’s nice to have, other benefits would be higher on my list. Buy it, however, if you can afford to.
Do You Want a Future-Purchase Option? Only if you can afford it and expect your earnings to rise by much more than the general inflation rate. It lets you add coverage at specified times in the future, even if a change in your health status makes you otherwise uninsurable.
The right to buy more insurance without a health exam is built into some of the more expensive policies. Separately, it may cost 5 to 15 percent of the policy price, depending on your age and the company. Each time you exercise this option, you’ll pay the premiums for your age at the time.
If you take this rider, use it. Add to your policy on a regular basis. A future-increase option generally expires somewhere around age 55 or earlier. Don’t fail to update your policy in that final year.
If you don’t choose this option and stay in good health, you can still increase your disability insurance as your income rises. But you’ll have to pass a medical exam.
Do You Want a Reducing Term? This is a neat solution for people who need extra coverage for a specific period. Say, for example, that you’re buying a business and agree to pay the owner over eight years. As security for the payments, the owner might ask you to carry both life and disability insurance. You can buy coverage that expires on a date you name, which in this case would be the date that your debt is supposed to be paid up. The policy should piggyback on a regular policy that keeps you and your family protected too.
Other Policy Provisions. Some of these are built into your basic policy, some are sold separately. Every company is a little different. Consider all your options but don’t waste your money on minor stuff.
• Rehabilitation payments. Your policy will pay for rehab in order to get you back to work. It should also train you for a new job and pay for mechanical aids that help you function at the office. But it won’t finance any rehabilitation if it’s clear that you’ll never be able to work again. Expect your disability insurer to be in close contact with your doctors and your employer.
• Transition and fallback benefits. Disability income normally stops when you return to work. But what if your old job turns out to be too much for you? What if it takes a while to rebuild your former income? What if you lost a bonus by being away from work? The policy should cover any losses due to your disability, support a home-to-job transition plan, and resume paying benefits if it’s clear that you’ll have to train for something else.
• Integration with Social Security and other plans. This sensible provision saves you quite a bit of money. If you go on disability, the insurer reduces your payment by any disability benefits that you receive from Social Security, workers compensation, the military, or a state disability fund. Your total payment doesn’t change. It simply comes from different sources.
• A Social Security rider. Comes with policies that sell lower benefits. The rider pays you extra if you’re not disabled enough to qualify for Social Security payments.
• Limited “soft” coverage. A growing number of insurers limit benefits for ailments that can’t be measured objectively, such as back and muscle pain, headaches, repetitive stress disorders, and chronic fatigue syndrome.
• Presumptive disability. A lottery ticket. You are presumed to be totally disabled if you lose the use of any two limbs, eyesight, speech, or hearing. Full payment is due even if you go back to work full-time. Generally, this isn’t worth paying extra for. If you really are disabled, the basic policy will pay. If you aren’t, you shouldn’t collect.
• Accidental death and dismemberment. Another lottery ticket that hitches a bit of life insurance to your coverage. But it pays only if you die or lose a limb in an accident, not if you die after an illness (the more likely case).
• Hospital income. You get a certain number of dollars per day while you’re in the hospital. This provision may not be worth a lot. Modern medical practice tries to keep you out of the hospital or sharply limits your stay.
• A premium refund. A way that some insurers make money by appealing to your greed. Under this rider, you may get some or all of your premium back after 5 or 10 years if you’ve made no claims or only a small claim. The insurer might even project that you’ll earn a high rate of interest on the money. But that rate vanishes if you have a period of insured disability or if your group of policies is less profitable than the insurer expected. For this dubious gamble, you might pay an extra 50 percent or more. Don’t be tempted. Put that money toward strengthening some other part of your disability coverage.
• New designs. Insurers are trying to broaden the market for disability coverage. A Unum life insurance policy, for example, has a rider option for long-term care. It lets you draw a percentage of the life insurance benefit to help cover the cost of a nursing home, assisted living, home health care, and adult day care, if you’re so disabled that you need it. A MassMutual policy replaces the retirement contributions you lose during years when you’re totally disabled and cannot work (the money goes into a taxable trust, but you can manage the investments). Watch for other new ideas to emerge.
Make Careful Comparisons Before You Replace an Old Noncancelable Policy with a New One. Your old policy may have a more generous definition of disability than the new one you’re being offered. If you need more coverage, consider adding a second policy. Treat your first one as the treasure it is.
Companies vary widely in what their policies cover and what risks they accept, so disability insurance isn’t something you can buy yourself. You’ll need an insurance agent or a full-service financial planner to explain the options. If you can’t afford a regular policy, ask about annually renewable coverage (page 494). And be sure that the company is rated A or higher for safety and soundness.
Readers of this book can access an excellent firm, Low Load Insurance Services in Tampa, Florida, that normally works only with fee-only financial planners. Its specialty is finding good coverage at a competitive price. Go to www.llis.com/quote_request.shtml, click on “Disability,” enter my name—Jane Bryant Quinn—in the “advisor” space, and fill in the form. Or call 877-254-4429. You’ll get a quote on a disability policy plus a case manager to provide advice and help you with the application. LLIS also offers you term and permanent life insurance. (P.S., I earn nothing from making this recommendation.)
When you fill out your application, you have to disclose all past and present illnesses. The insurance company will either (1) cover them at the policy’s regular price, (2) charge you a higher price, (3) restrict your benefit, (4) refuse to cover a particular ailment, or (5) refuse to cover you at all. If any restriction is applied, ask your insurance agent to try again. Sometimes, a little pressure—or checking with some other insurers—can lead to a better result.
Don’t lie about your illnesses, physical or mental. The insurer will check your health history through the Medical Information Bureau (page 483). It may also check with your doctors. If you’re seeing a psychologist or psychiatrist, disclose it—especially if you have a preexisting mental health condition and even if you’re in therapy just for general enlightenment. If you leave something out, the insurer can use it against you when you make a claim.
Once your policy has been in effect for two years (three years in some states, including California), the insurer normally shouldn’t deny payment based on errors of fact in your application. If you put down the wrong age, payments will be adjusted to match your real age.
But the two-year limit doesn’t protect you if the error involved your health history. The insurer will investigate. Your claim can be rejected on grounds of fraud if you failed to list a pertinent illness that would have affected the insurer’s decision to accept you. The insurer decides what’s pertinent.
Warning: many insurers are aggressive about this! Even trivial ailments not listed (acne, in one famous case) could be used to deny a claim and cancel your policy. You might win your case in court, but who wants to go through all that? If you are turned down, ask the insurer to specify in writing why, exactly, your claim fails to meet the contract’s terms. These decisions are often subjective. You need an answer specific enough to help a lawyer judge your case.
You pay no tax on disability income from policies that you buy with your own after-tax money. Most workers compensation isn’t taxable either. Nor is income from state disability funds (unless the payments are in lieu of unemployment pay). But income from employer-paid plans is fully taxed. Up to 85 percent of your Social Security disability income can also be taxed, depending on how much other income you have.
What if your employer gives you a basic disability policy and you supplement it by buying coverage through payroll deduction? If you become disabled, the company-paid portion of your benefit is taxable; the rest isn’t. Fortunately, you don’t have to figure this out yourself. The insurer will send you a 1099 form every year.
You’re counting on this insurance company to pay you a check many years in the future. But for some companies, disability coverage has been a money loser. Who can you trust to stick around?
Unum specializes in disability insurance. The top diversified companies include MassMutual, Northwestern Mutual, Guardian, Life Insurance Company of America, and Principal Financial Group. In low-load individual coverage: USAA Life. The leaders in employee group coverage include Unum, MetLife, and Hartford Life.
Many companies, especially the smaller ones or the ones with small disability portfolios, are wrestling with the question of whether to stay in the market at all. Some of them sell the policies of other insurers. Some put their names on policies that other insurers develop and manage.
If your company decides to drop its disability business, two things could happen. It could service its existing policies, although perhaps not as well as it did before. Or it could sell its policies to another insurer. In that case, keep track of when your premiums are due, just to be sure you’re not lost in the shuffle. If you don’t pay your premiums, for whatever reason, your policy will expire. For simplicity, you can have the premium deducted automatically from your bank account each month.
It is rare, but not unknown, for a company to “neglect” to send renewals to policyholders who had claims in the past and might again. This practice, sometimes called “starring,” is illegal. If you think it has happened to you, complain to the state insurance department.
Look for companies with top ratings for safety and soundness (page 405). If insurers run into financial problems, they sometimes start treating policyholders badly, denying or delaying claims. You might be pressed to accept a modest lump sum instead of years of benefits.
Follow the rules exactly when filing a claim. A company may turn you down just because you didn’t fill out the claim form properly, or failed to follow complex claim procedures, or missed a deadline. You’re especially vulnerable if you have an aggressive insurer who thinks you won’t sue.
Talk to your doctor before filling in the form the insurer sends, which seeks a description of how disabled you are. The questions may be phrased to tilt the answers the insurer’s way. Be sure that your doctor understands your job’s physical and mental requirements so that he or she can judge accurately whether you’re able to perform.
If you have any trouble collecting, call a lawyer right away. You can check online for lawyers who specialize in disability insurance claims. Also, write to your state’s insurance department (find it by going to www.naic.org).
Most claims are paid in good faith, but there’s bad faith in the industry too.
If you have to work for a living and have no disability insurance, you effectively have no financial plan. Everything you own is held hostage to your continuing ability to get up in the morning and catch a bus. That’s no way to live. Buy as much coverage as you need or afford. Fit it into your budget the way you do any other necessity, and get on with your life.