Course Material. If you're like most people, you depend on your paycheck to pay your monthly living expenses.

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1 Course Material Chapter 1 Disability Income Insurance If you're like most people, you depend on your paycheck to pay your monthly living expenses. But what would happen if you had a disabling accident or illness and could not work? How would you... replace your income? make your monthly rent or mortgage loan payments? buy your groceries? make your car payments? handle the rest of your day-to-day living expenses? provide for your children's education? save for retirement? Most people don't realize the risk of becoming disabled, permanently or temporarily, at some point in their lives. But the reality is that at age 40, your chances of becoming disabled for 90 days or more prior to age 65 is 43%. (Source: 2004 Field Guide, National Underwriter) When evaluating the chances of disability, you should carefully consider sources of available funds: My employer covers me: How long would the business continue to pay you? How much would it pay you? When would your employer have to hire a replacement? Could the business afford to pay both? I'll use my savings: If you saved 10% of your income each year, one year of total disability could wipe out 10 years of savings. Can you afford that? I'll get a loan: Without an income, who will lend you money? My spouse works: Can your spouse earn enough and be partner, parent, private nurse, and employee -all at the same time? I'll sell my investments: Will a sale under forced conditions bring a true value? What will their value be at the time you are disabled? I can collect Social Security: You cannot collect benefits until the end of the fifth full calendar month of total disability and only if it is expected to last 12 months or more. What will you do if your disability doesn't meet those requirements? Even if it does, can you wait six months for payment? 4

2 I'll count on family, friends, or charity: Would these sources have funds for you to use? Do you want to depend on them? Make a plan for income replacement When most people think about insuring their valuables, they think about their car, their home, or maybe an expensive piece of jewelry. What many people fail to realize is that all of those things are purchased from your income. Your income is typically your largest asset. Think about how much you earn in a year, and think about what that would be over a lifetime. If an individual earns $50,000 per year and he or she is 25 years old, in a 40- year period, he or she will earn $2 million, and that's without any sort of inflation. If you factor in modest inflation, the number could easily be twice as high. We don't hesitate to insure our homes, our cars and other valuable possessions. So why would you not insure something that is infinitely more valuable than all those things? If you're still not convinced that your income is worth insuring, think about how long you'd last without your paycheck before it would be difficult to pay for everyday expenses. The LIFE Foundation conducted a study that found that 70 percent of working Americans couldn't make it 1 month before financial difficulties would set in. More than 1 in 4 Americans wouldn't make it a week. When a disability occurs - and the odds are much greater than you might realize - disability insurance can provide you and your family with a source of replacement income to help make ends meet until you're able to return to work. Explore this section to learn more about disability coverage, including the different sources of disability income protection and ways to go about getting coverage. An insurance needs calculator can help you determine how much coverage you need. Ask most people to think about their most valuable asset, and they'll mention their home, their car, their jewelry, or other possessions. But for most of us, our most valuable possession isn't anything of those things. It's our ability to earn a living. And just as you would insure your car, your home, and other valuable possessions, you need to insure yourself in case you are no longer able to work. That's what disability insurance does. It provides a source of replacement income if you're unable to work due to an illness or accident. When a disability leaves you unable to work for an extended length of time, you lose the ability to earn an income- the one thing you've always relied on to provide for yourself and your loved ones. Meanwhile, your living expenses continue-in fact, they're likely to increase for a number of reasons. You could need help around the house or have higher medical expenses, for example. That's where disability income insurance (DI) comes in. It's designed to help you maintain your standard of living when you cannot work. If you don't have much in the way of assets for a financial cushion, you need enough to cover costs and supplement your income until you can go back to work. 5

3 Disability income insurance is needed by just about everyone who earns a living. Surprisingly, single people often need it more than married couples because they don't have a spouse's income to fall back on if they are injured or become too sick to work. On the other hand, most married people have a hard time imagining what it would be like to live on one salary when they barely get by on two. And unfortunately, disability strikes more often than you may think. Most people purchase auto, home and life insurance to protect themselves against the threat of loss. But they may not understand the importance of insuring a portion of their income against the threat of disability. The likelihood of a disability is greater than most people realize. If becoming disabled may seem unlikely, the odds may surprise you. Roughly 3 in 10 Americans will suffer a disability lasting 3 months or longer before the age of 65. Nearly 1 in 5 Americans will be disabled for one year or more during their working years. For many, a sudden interruption of income could have serious financial consequences. Most of us have some kind of personal debt, typically a mortgage or credit card bills. Would you be able to maintain your standard of living if you were too ill or injured to work for an extended length of time? Half of all home foreclosures in the United States result from disability as do an alarming number of personal bankruptcies. Simply put, if you have a job you likely need disability insurance. The other thing to keep in mind is that an accident or illness that keeps you out of work for a period of time can be very costly. That's because people who become disabled not only need to continue providing for loved ones, but for themselves as well. A disabling injury or illness could lead to medical bills, modifications to your car or home, or other unforeseen needs that can be quite expensive. For all these reasons, almost anyone who works whether they're single, married, with children or without should consider disability insurance. Disability is considered either "Own Occupation," which is the inability to perform the duties of your own specific occupation, or "Any Occupation," which is the inability to perform the duties of any job for which your education and training qualify you. In fact, some may argue that disability income insurance is the most important type of insurance policy you can purchase -- more important than homeowner's, health, auto, or even (in certain cases) life insurance. That's because disability income insurance protects one of your most important and valuable assets: your ability to earn income. After all, it is your ability to earn income that allows you to have a car, a home, and a particular lifestyle, as well as to purchase the various insurance policies that safeguard your net worth and the financial well-being of your loved ones. Disability Insurance Facts 1. Someone who is 35 years old has a 50 percent chance of disability for 90 days or more before they turn Most people in the U.S. are better prepared financially in case of death (usually with life insurance) than if they get disabled, even though the chances are at least three to five times greater (depending on age) that a disability will occur. 3. Upwards of 375,000 Americans become totally disabled every year. 4. Approximately one out of seven people who are between the ages can expect to become disabled for five years or longer. 6

4 5. Almost 30 percent of the people who are between the ages 35 and 65 will experience a disability that lasts at least 90 days during their working careers. 6. About 110 million Americans do not have long term disability insurance. 7. About 8 million adults have some disability that limits or prevents them from working percent of all foreclosures on conventional mortgages are brought about by a disability. Approximately 2 percent are caused by the death of the homeowner. 9. Benefits from an employer plan are taxable. Individual policies, purchased as an individual pay benefits free of income tax. 10. Most people, no matter their income, spend 65 percent to 75 percent of their cash flow. In thinking about this, this means a person should aim toward securing as much disability income insurance they can toward the goal of replacing such income. 11. If you put away 10 percent of your income each year, then simple arithmetic says that one year of being totally disabled could wipe out the 10 years of principal that you put into your savings. 12. How good is social security disability income? Anyone at any income level can apply for Social Security Disability Insurance but one requirement is that you have to have worked at least 10 years before becoming disabled. 13. The Social Security disability Insurance program pays $722 per month on average. The requirements to receive disability benefits are so strict that only about 35 percent of the individuals that apply for benefits actually qualify and wind up receiving benefits. 14. The most common chronic conditions listed for limitation on working are back disorders (21 percent), followed by heart disease and arthritis. Source: from the MDRT Think you're already protected? Think about this: Social Security disability payments are limited to disabilities expected to last at least 12 months or end in death. To qualify, you must be unable to engage in any type of work. Personal Savings can best be used to build a comfortable future. Add up your monthly bills, then multiply by 12 and you can see how fast even substantial savings can be depleted by unexpected illness or injury. Long-Term Disability Insurance offered through your employer is a start. But workplace disability benefits often times cover only about 50% of your income. Can your family survive on half of a paycheck? Here are the other reasons why Group Long-Term Disability (LTD) may not be enough: Group LTD usually covers only a portion of an employee s compensation LTD benefits are generally taxable if the employer pays the premiums 7

5 Many plans don t cover bonus or incentive compensation There is often a maximum monthly cap and, as a result, an employee's monthly after-tax income during a disability may drop by 50% or more! When evaluating the chances of disability, you should carefully consider sources of available funds: My employer covers me: How long would the business continue to pay you? How much would it pay you? When would your employer have to hire a replacement? Could the business afford to pay both? I'll use my savings: If you saved 10% of your income each year, one year of total disability could wipe out 10 years of savings. Can you afford that? I'll get a loan: Without an income, who will lend you money? My spouse works: Can your spouse earn enough and be partner, parent, private nurse, and employee -all at the same time? I'll sell my investments: Will a sale under forced conditions bring a true value? What will their value be at the time you are disabled? I can collect Social Security: You cannot collect benefits until the end of the fifth full calendar month of total disability and only if it is expected to last 12 months or more. What will you do if your disability doesn't meet those requirements? Even if it does, can you wait six months for payment? I'll count on family, friends, or charity: Would these sources have funds for you to use? Do you want to depend on them? Tax Advantage When you buy an individual DI policy, the annual premiums you pay are not tax deductible. If you collect the benefits, however, the money you receive will not be taxed. When you purchase disability insurance through your employer, you may be able to have premiums deducted from your pay on a pretax basis. If this option is available, you lower the amount of earnings your employer reports to the IRS and thus your current income taxes. The downside is that any benefits you get are considered taxable income. How Can I insure against loss of income? 1. Employer-paid disability insurance This is required in most states. Most employers provide some short-term sick leave. Many larger employers provide long-term disability coverage as well, typically with benefits of up to 60 percent of salary lasting from five years to age 65, and in some cases extended for life. If you work, your employer may provide disability income insurance or group coverage. Group coverage is less 8

6 expensive than individual, or private, policies, but it won't pay as much as your salary. So if the coverage won't provide at least 60% of your income, won't pay benefits up to age 65, and has a waiting period longer than your savings will keep you afloat, you'll probably need private insurance, too. 2. Social Security disability benefits This can be paid to workers whose disability is expected to last at least 12 months and is so severe that no gainful employment can be performed. Social Security also offers some disability income insurance. But beyond the many restrictions placed on who can qualify, the amount Social Security pays probably won't be enough for you or your family to maintain the standard of living you're used to. So it's not usually wise to rely exclusively on Social Security benefits when determining the amount of DI protection you'll need. 3. Individual disability income insurance policies Other limited replacement income is available for workers under some circumstances from workers compensation (if the injury or illness is job-related), auto insurance (if disability results from an auto accident) and the Department of Veterans Affairs. For most workers, even those with some employer-paid coverage, an individual disability income policy is the best way to ensure adequate income in the event of disability. When you buy a private disability income policy, you can expect to replace from 50% to 70% of income. Insurers won t replace all your income because they want you to have an incentive to return to work. However, when you pay the premiums yourself, disability benefits are not taxed. (Benefits from employer-paid policies are subject to income tax.) 4. Workers Compensation If you're employed and you suffer a disabling illness or injury, you might be able to count on Workers' Compensation insurance to replace some of your salary. All states require employers to provide Workers' Compensation coverage. It typically pays about two-thirds of your pre-disability income. However, it only pays in cases where your illness or injury is related to your work, and the vast majority of long-term disabilities are not job-related. 5. State Disability Insurance Programs A handful of states provide short-term disability coverage--typically for up to six months--that workers pay for through a payroll deduction. They are California, Hawaii, New Jersey, New York and Rhode Island, as well as Puerto Rico. For those who live in these states, this can be an important source of short-term income replacement. What are the types of disability insurance? There are two types of disability policies: Short-Term Disability (STD) and Long-Term Disability (LTD): 9

7 1. Short-Term Disability policies (STD) have a waiting period of 0 to 14 days with a maximum benefit period of no longer than two years. 2. Long-Term Disability policies (LTD) have a waiting period of several weeks to several months with a maximum benefit period ranging from a few years to the rest of your life. Disability policies have two different protection features that are important to understand. 1. Non cancelable means the policy cannot be canceled by the insurance company, except for nonpayment of premiums. This gives you the right to renew the policy every year without an increase in the premium or a reduction in benefits. 2. Guaranteed renewable gives you the right to renew the policy with the same benefits and not have the policy canceled by the company. However, your insurer has the right to increase your premiums as long as it does so for all other policyholders in the same rating class as you. In addition to the traditional disability policies, there are several options you should consider when purchasing a policy: Additional purchase options Your insurance company gives you the right to buy additional insurance at a later time. Coordination of benefits The amount of benefits you receive from your insurance company is dependent on other benefits you receive because of your disability. Your policy specifies a target amount you will receive from all the policies combined, so this policy will make up the difference not paid by other policies. Cost of living adjustment (COLA) The COLA increases your disability benefits over time based on the increased cost of living measured by the Consumer Price Index. You will pay a higher premium if you select the COLA. Residual or partial disability rider This provision allows you to return to work part-time, collect part of your salary and receive a partial disability payment if you are still partially disabled. Return of premium This provision requires the insurance company to refund part of your premium if no claims are made for a specific period of time declared in the policy. This clause means that you do not have to pay premiums on the policy after you re disabled for 90 days.this clause means that you do not have to pay premiums on the policy after you re disabled for 90 days. How can I purchase disability insurance? 10

8 Talk to the agent who sells you your life, health, auto or business insurance he or she may either sell disability coverage or will be able to refer you to an agent who does. Make sure that you understand what you are buying and don t be afraid to ask your agent to explain exactly what is in the policy. Do You Need Disability Insurance? Mr. Smith also a Type I diabetic and understands that this gives him a higher-thanaverage chance of becoming disabled and unable to work. That's why after recently meeting with his financial planner, he decided to supplement his employer's disability coverage with an additional long-term disability insurance policy. "I have two young children, a wife to support and a house to maintain. "I wanted to make sure if there is an incident that there is ample financial protection for them and myself." Let's face it: Nobody likes to think about what life would look like should disability strike. But the reality is one third of all Americans between the ages 35 and 65 will become disabled for more than 90 days, according to the American Council of Life Insurers. One in seven workers will be disabled for more than five years. And while many people think that disabilities are typically caused by freak accidents, the majority of long-term absences are actually due to illnesses, such as cancer and heart disease. The loss of income can be so devastating that it forces some people to foreclose on their home or even declare bankruptcy. Disability insurance replaces a portion of your income if you become disabled and are no longer able to work. A typical group plan offered by an employer will replace up to 60% of your salary. Supplemental plans and individual policies will often cover up to 70% or 80%. (No plan will cover all of your salary for fear you will have little or no incentive to get back to work.) Benefits typically last for a set number of years (say five years) or until you reach retirement age. (Benefits typically stop around retirement age since once you retire, you would no longer be dependent on the income you generated by working, anyway.) If you pay the premium out-of-pocket meaning your employer doesn't cover the tab benefits are tax free. Long term disability policies vary greatly. While some are iron-clad and pay benefits when you need them, others have more holes than a pasta strainer. Folks trying to save some money with a leaner plan may find it ultimately worthless. Below we'll discuss the difference between group and individual policies. Think you can stop reading because you've got a solid policy through work? Wrong. You may still want to purchase additional insurance on your own. Here's what you need to know. Group Plans Unless you're self employed, the first thing you should do is figure out if your employer provides long-term disability insurance in the first place. 11

9 As mentioned above, the typical group plan covers up to 60% of one's income. (This is offset by any other benefits you may receive from social security or worker's comp.) But the amount may actually be far less than that. That's because most group plans have a benefit cap of, say, $5,000 a month or $60,000 a year, says Todd Katz, vice resident of group disability for MetLife. Another surprise for many is that bonuses don't usually make it into the equation. A group plan will only insure your regular salary. Another shortcoming: Most group policies limit the amount of time it will pay benefits if you can't perform your job duties to just two years. After that, you'll need to prove you can't hold down any job. Not only does this keep costs down for your employer, but the idea is that you can get new job training during those initial two years that you receive benefits, says Katz. What to Look For in a Policy If you find that you need an individual disability income policy over and above any other income protection you may have, here s what you need to know: Definition of Disability Policies vary. Some pay benefits if you are unable to perform the duties of your customary occupation, others only if you can engage in no gainful employment at all. Be sure to ask your insurance agent how various policies define disability. Extent of Disability Some older policies require that you be totally disabled before payments begin. Partial disability sometimes is covered for a limited time but most often only if the partial disability follows a period of total disability for the same cause. Some policies may not require total disability before partial disability payment. "Residual" Benefits If you are able to work but your income is reduced because you cannot fulfill all of your job responsibilities, residual benefits can help to make up the difference in your income. A standard feature insome policies (added with a rider to others), a residual benefit allows partial payment based on your loss of income generally without prior total disability. Presumptive disability Even if you can still perform some or all of your regular job, you are presumed fully disabled and are entitled to full benefits under specified conditions, such as loss of sight, speech, hearing, or use of limbs. Size of benefits 12

10 Monthly benefits are calculated in terms of stable, earned income at the time of purchase. Most insurers, not wanting to provide benefits so sizable that they would encourage workers to remain at home, limit benefits from all sources to no more than 70 to 80 percent of monthly income. Lower-paid workers can expect to receive more of their predisability incomes while higher-paid workers generally receive less. When the payments begin Today s policies allow you to decide when benefit payments begin. You can choose a waiting period at the time of application; these range anywhere from the 31st day to six months or more after the onset of the disability. Depending on how much money you have saved, and your other resources, you can reduce your premiums by electing to wait 60 days, 90 days, or even six months before you start to receive benefit payments. Remember, though, that the first check is usually not paid until 30 days after the waiting period. Length of coverage By choosing a benefit term, you will elect benefits that are payable for one year, two years, five years, to age 65, or for a lifetime. Since disability benefits are designed to replace the income you would otherwise earn by working, most people do not need benefits extending beyond the working years. Electing shorter benefit periods can save premium dollars, but bear in mind that if you need this insurance at all, you probably need it most to cover a disability that permanently removes you from the workforce. A lengthy disability threatens your financial security much more than a short-term disability. Keeping pace with inflation For an additional premium, you can add a cost-of-living adjustment (COLA) to basic disability income coverage. This provision increases benefit payouts by a specified percentage, generally 4 to 10 percent, after each year of disability and can be important particularly during a lengthy period of total disability. While this is a relatively expensive option, it could be vital to maintaining your standard of living. Most policies include a waiver of premium provision, so that you don t have to pay any more premiums after you re disabled for 90 days. Some policies offer the opportunity to buy additional disability coverage to keep pace with a rising income, without having to pass a medical examination or to submit further medical evidence of insurability Key terms to know: - The definition of disability Some policies pay benefits if you are unable to perform the customary duties of your own occupation. Others pay only if you are unable to perform any job suitable for your education and experience. Some policies define disability in terms of your own occupation for an initial period of two or three years and then continue to pay benefits 13

11 only if you are unable to perform any occupation. "Own occupation" policies are more desirable, but more expensive. - Benefit period The benefit period is the amount of time you will receive monthly benefits during your life. Experts usually recommend that the policy you buy pay you benefits until at least age 65, at which point Social Security disability will take over. If you are young, you may consider buying a policy offering lifetime benefits because it will still be relatively inexpensive. - A policy that will replace from 60 percent to 70 percent of your total taxable earnings A higher replacement percentage, if available, is more expensive. Evaluate your other sources of income before deciding how much disability coverage you need. - Coverage for disability resulting from either accidental injury or illness An accident-only policy is less expensive but does not provide adequate protection. Ideally, both accident and illness coverage should be purchased. - A cost-of-living increase in benefits You are buying a policy today that may not pay benefits for a decade or more. Should you need those benefits, you will want them to have kept pace with increases in the cost of living. (Some companies also offer "indexed" benefits, keeping pace with inflation after benefit payments begin.) - A policy paying "residual" or partial benefits This type of policy is available so that you can work part-time and still receive a benefit making up for lost income. A standard feature in some policies, and added by a rider to others, a residual benefits policy pays partial benefits based on loss of income without an initial period of total disability. - Transition benefits Offered by some companies, it can offset financial loss during a post-disability period of rebuilding a business or professional practice. - Ongoing coverage A non-cancelable policy which will continue in force as long as the premiums are paid; neither the benefit nor the premium can change. A guaranteed renewable policy keeps the same benefits but may cost more over time since the insurer can increase the premium if it is increased for an entire class of policyholders. - Financial stability Check the financial ratings of an insurer. Your insurance agent or company representative should provide this information or check with the following companies, which rate insurance company strength: Pre-existing Medical Conditions 14

12 Although definitions do vary, a pre-existing condition is a mental or physical condition that exists prior to the effective date of insurance coverage. Most plans exclude or reduce disability benefits for any illness or injury for which an individual received medical treatment or consultation within the time specified in the policy before they will be covered under the plan. This exclusion is often defined as any medical condition for which medical care was received three to six months prior to the effective coverage date. More specifically, the pre-existing condition exclusion usually applies to: 1. Any condition for which you have consulted a doctor or other licensed medical professional 2. Any condition for which you received medical treatment, services or advice 3. Any condition for which you have undergone diagnostic procedures 4. Any condition for which you have taken prescribed drugs or medications during the pre-existing condition time period Cancer survivors need dependable insurance coverage. As a survivor, you may find it difficult to obtain new coverage if your existing policy lapses. If you are self-employed or are seeking private coverage, you may face high premiums, pre-existing condition exclusions and extended waiting periods for benefits to start. The ability of individuals with pre-existing medical conditions to be insured may vary because of differences in state laws. Some states have laws specifically related to insurance and cancer. For example, there may be a limit on the length of time a person can be denied life or disability insurance based on a diagnosis of cancer. A doctor will likely need to certify that the cancer has not recurred in the applicant before the policy is approved. Chapter 1 QUIZ 1. Which one of the following is not considered a Pre-existing Medical Conditions? A) Is a mental or physical condition that exists prior to the effective date of insurance coverage B) Any condition that has existed for over 5 years 2. Define Disability. A) A non-cancelable policy which will continue in force as long as the premiums are paid. B) If you are unable to perform the duties of your customary occupation. 3. What rider increases your disability benefits over time based on the increased cost of living measured by the Consumer Price Index? A) Cost of living Adjustment B) Waiver of premium 15

13 4. What type of disability policy has a waiting period of 0 to 14 days with a maximum benefit period of no longer than two years? A) Short-Term Disability policies (STD) B) Long-Term Disability policies (LTD) Chapter 2 What Else Do You Need To Know? Selecting the level and duration of benefits is only the first step. To be sure that coverage will continue, you should ask about renewability. Most disability income insurance comes with one of two types of renewability provisions: Non-cancelable policies give you the right to continue a policy by timely payment of premiums, and the insurance company cannot change the premiums and benefits shown in the policy. Guaranteed renewable policies will be automatically renewed, with the same benefits, but the premium may be increased if it is changed for an entire class of policyholders. Think about how much you earn in a year, and think about what that would be over a lifetime. If an individual earns $50,000 per year and he or she is 25 years old, in a 40-year period, he or she will earn $2 million, and that's without any sort of inflation. If you factor in modest inflation, the number could easily be twice as high. We don't hesitate to insure our homes, our cars and other valuable possessions. So why would you not insure something that is infinitely more valuable than all those things? If you're still not convinced that your income is worth insuring, think about how long you'd last without your paycheck before it would be difficult to pay for everyday expenses. The LIFE Foundation conducted a study that found that 70 percent of working Americans couldn't make it 1 month before financial difficulties would set in. More than 1 in 4 Americans wouldn't make it a week. When a disability occurs - and the odds are much greater than you might realize - disability insurance can provide you and your family with a source of replacement income to help make ends meet until you're able to return to work. Explore this section to learn more about disability coverage, including the different sources of disability income protection and ways to go about getting coverage. An insurance needs calculator can help you determine how much coverage you need. Ask most people to think about their most valuable asset, and they'll mention their home, their car, their jewelry, or other possessions. But for most of us, our most valuable possession isn't anything of those things. It's our ability to earn a living. And just as you would insure your car, your home, and other valuable possessions, you need to insure yourself in case you are no longer able to work. That's what disability insurance does. It provides a source of replacement income if you're unable to work due to an illness or accident. 16

14 When a disability leaves you unable to work for an extended length of time, you lose the ability to earn an income- the one thing you've always relied on to provide for yourself and your loved ones. Meanwhile, your living expenses continue-in fact, they're likely to increase for a number of reasons. You could need help around the house or have higher medical expenses, for example. That's where disability income insurance (DI) comes in. It's designed to help you maintain your standard of living when you cannot work. If you don't have much in the way of assets for a financial cushion, you need enough to cover costs and supplement your income until you can go back to work. Disability income insurance is needed by just about everyone who earns a living. Surprisingly, single people often need it more than married couples because they don't have a spouse's income to fall back on if they are injured or become too sick to work. On the other hand, most married people have a hard time imagining what it would be like to live on one salary when they barely get by on two. And unfortunately, disability strikes more often than you may think. Most people purchase auto, home and life insurance to protect themselves against the threat of loss. But they may not understand the importance of insuring a portion of their income against the threat of disability. The likelihood of a disability is greater than most people realize. If becoming disabled may seem unlikely, the odds may surprise you. Roughly 3 in 10 Americans will suffer a disability lasting 3 months or longer before the age of 65. Nearly 1 in 5 Americans will be disabled for one year or more during their working years. For many, a sudden interruption of income could have serious financial consequences. Most of us have some kind of personal debt, typically a mortgage or credit card bills. Would you be able to maintain your standard of living if you were too ill or injured to work for an extended length of time? Half of all home foreclosures in the United States result from disability as do an alarming number of personal bankruptcies. Simply put, if you have a job you likely need disability insurance. The other thing to keep in mind is that an accident or illness that keeps you out of work for a period of time can be very costly. That's because people who become disabled not only need to continue providing for loved ones, but for themselves as well. A disabling injury or illness could lead to medical bills, modifications to your car or home, or other unforeseen needs that can be quite expensive. For all these reasons, almost anyone who works whether they're single, married, with children or without should consider disability insurance. Disability is considered either "Own Occupation," which is the inability to perform the duties of your own specific occupation, or "Any Occupation," which is the inability to perform the duties of any job for which your education and training qualify you. In fact, some may argue that disability income insurance is the most important type of insurance policy you can purchase -- more important than homeowner's, health, auto, or even (in certain cases) life insurance. That's because disability income insurance protects one of your most important and valuable assets: your ability to earn income. After all, it is your ability to earn income that allows you to have a car, a home, and a particular lifestyle, as well as to purchase the various insurance policies that safeguard your net worth and the financial well-being of your loved ones. 17

15 While most individually purchased disability income policies are either non-cancelable or guaranteed renewable, other kinds do exist. Conditionally renewable policies can be declined by class, geographic area or for reasons stated in the policy other than deterioration of health. Optionally renewable or conditionally renewable policies are extended at each anniversary or premium due date if the insurance company decides to do so. (Some policies are renewable to age 75 if you are still employed full-time.) In general, if you pay the premiums for an individual disability policy, payments you receive under the policy are not subject to income tax. If your employer had paid some or all of the premiums, some or all of the benefits may be taxable. When you buy, consider a policy that pays disability benefits for both accident and illness. Some policies pay only for accidents, but you want to be insured for illness too. In fact, as you get older, it is more likely that you will need to be covered for an illness than for an injury. Where do I buy Disability Insurance? 1. Through your employer Your employer, particularly if you work for a large company, may provide shortand/or long-term group disability coverage at no cost to you. One of the best features of employer-provided coverage is that there is no underwriting, meaning you automatically qualify for coverage. You should be aware that if you start a new job and have a pre-existing medical condition, there may be short-term limits on your coverage, typically a waiting period of 12 months. Another valuable benefit of employer-provided coverage is that you often have the option to increase your coverage from, say, half to two-thirds of your base salary. To qualify for additional coverage, you may have to answer a few basic questions about your health. It s important to keep in mind that if you have group coverage and you leave your job, you generally are not able to take the coverage with you. If your employer does not provide group disability insurance coverage, it may make a disability benefit available to you on a voluntary, employee-paid basis. While you pay the full cost of the benefits under a voluntary arrangement, there are several advantages to buying disability insurance this way. Voluntary plans help workers get coverage more easily than if they were to purchase an individual policy on their own outside of the workplace. Premiums are typically paid through an automatic payroll deduction and can be as much as 10% to 20% less because of efficiencies in enrollment and billing procedures. Additionally, you may be eligible for more coverage under a voluntary plan than is offered by a traditional group plan. 2. Through a professional organization Many professional associations offer their members the opportunity to purchase disability insurance through a group plan. Typically, little underwriting is involved and premiums are based primarily on your age and income. This type of 18

16 coverage is generally cheaper than an individual policy you would purchase on your own through a local insurance professional. If your need for coverage is great and your budget is limited, this is definitely an option you'll want to explore. However, there are several drawbacks. If you change professions, the coverage may not follow you. And there's always the chance your professional organization could decide to drop its disability coverage. That can't happen with most types of privately purchased disability insurance, which are guaranteed renewable as long as you pay your premiums. 3. Buy it on your own Another good alternative is an individual disability insurance policy you purchase on your own through a qualified insurance professional. You never need to worry about losing coverage if you change jobs. An individual policy also gives you the opportunity to consider policies from a multitude of carriers. If you buy through work, you're usually limited to buying (or increasing) coverage from the one carrier with which your employer is contracted. One downside to individual coverage is that it can get pricey depending on the policy's features and benefits. Your budget, the benefits you desire and your health status help determine whether you obtain coverage on your own, or through your employer or a professional association. What's most important is knowing that you'll have the wherewithal to make ends meet in the event you suffer an unexpected injury or illness and are unable to work and earn an income. How are disability premiums determined? Disability premiums are based on your age, sex, occupation and the amount of potential lost income you are trying to protect. In general, the lower the chance that your occupation puts you in harm s way, the lower the premium. The higher the chance of injury, the higher the premium. So, for instance, an accountant working in an office would have much lower disability premiums than a construction worker. How Much is the Benefit? Most policies have a fixed monthly benefit. Although the benefit doesn't increase over time, you can usually purchase extra coverage or cost of living increases. When do I Receive the First Benefit? There is a waiting period between the time you become disabled and the time you begin to receive benefits. Waiting periods can range from one week to two years. In general, the longer the waiting period, the less the policy costs. How Long Will the Benefits Last? The benefit period, which is how long you receive monthly benefits, can range from six months to the rest of your life, depending on what your company offers and the choices you make. How can I save money? 19

17 There are two ways to keep the cost of disability insurance down: 1. Electing a longer waiting period before benefits begin If you have enough resources to cover expenses during the first three months of disability, your premiums will be lower than with coverage that starts after 30 days. 2. Electing a shorter benefit period In this case, benefits are payable to age 65 the age at which you would normally retire instead of for a lifetime. However, choosing a benefit period of two-tofive years, ending before normal retirement age, could be penny-wise and poundfoolish. You might save money on premiums, but you could be without coverage when you need it most. Disability of long duration poses the greatest financial hardship. Own-Occupation Disability Insurance The most comprehensive definition of total disability available. This type of policy will have a definition that says: The inability to perform the material and substantial duties of your regular occupation, the insurance company will consider your occupation to be the occupation you are engaged in at the time you become disabled, they will pay the claim even if you are working in some other capacity. What I have found over the years is that people will choose to fight their disabilities. They will refuse to sit at home and collect a monthly disability check. Instead, as long as they are not severely disabled, most people choose to go back to work in some capacity to give themselves a sence of self worth, or just to go do something everyday. Ownoccupation disability insurance is the only plan that does not penalize somebody for going back to work in a different occupation while on a claim. Under this type of plan, the bottom line is if because of a sickness or injury you can not perform in your occupation, you will be considered totally disabled, even if you choose to do something else. Income Replacement Insurance This has become the most common definition of total disability in the industry today. Most insurance carriers that have stopped offering own-occupation disability insurance have moved to an income replacement definition. You will find the first part of the definition is very similiar to an own-occupation definition, but it is with the second part that the major change occurs. A typical income replacement definition will look something like this: 20

18 Because of sickness or injury you are unable to perform the material and substantial duties of your occupation, and are not engaged in any other occupation. As you can see there is a major difference between an income replacement and an ownoccupation definition of total disability. The income replacement definition will penalize you during a claim if you make the decision to go back to work, or earn another source of earned income while on a claim. I have found that most people if given the choice would go back to some work if possible, under this plan if somebody wants to go back to work in some capacity, the insurance company may offset your monthly benefit check. There is a common misconception that own-occupation disability insurance costs a lot more than an income replacement policy. While I am certain that in some scenarios this is true, as a blanket statement it is false. There are many professional occupations where an own-occ contract is actually less expensive than an income replacement policy. Many companies, as an example, do not like writing individual disability insurance on physicians. It is very likely that an own-occupation disability insurance policy may be less expensive from a company that still enjoys writing disability insurance for doctors. Gainful Occupation Coverage This definition of total disability is very common in an employer sponsored group long term disability insurance policy, or with property and casualty insurance companies that decided to release a disability insurance policy. It is quite simply the worst definition available and should be at the very least supplemented with a quality contract if not replaced entirely. This definition basically leaves the determination of whether or not you are disabled up to the insurance company. A typical definition will look like this: Because of sickness or injury you are unable to perform the material and substantial duties or your occupation, or any occupation for which you are deemed reasonably qualified by education, training, orexperience. Could somebody be forced to go flip burgers at McDonalds under this definition of total disability? Pobably not but it does leave it open for litigation and interpretation. You should be buying disability insurance so that you do not have to worry about your income if you can't do the material and substantial duties of your occupation, going wih this type of disability insurance policy is an inexperienced decision, and should be re-thought for an own-occupation plan. Many people who simply shop for the best disability insurance rate end up with this type of coverage. In my opinion, it is worthless, and you may end up with the Lemon of the disability insurance industry. How Much Disability Income Will You Need? Add up all the benefits you are entitled to under the public and private programs mentioned, along with the monthly income you could count on from other sources such as your savings. If the total approaches your required income after taxes, you can assume 21

19 that, should total disability strike, you would be able to pay your day-to-day bills while recuperating. You must remember that eligibility for Social Security disability benefits is contingent upon your disability being expected to last for at least 12 months or lead to your death. If the total from employer benefits, Social Security, and other programs along with your own resources will not be close to your pre-disability, after-tax income and will not be adequate to support your family, you will want to consider buying additional disability income insurance to make up the difference. The amount of long-term disability benefits you may receive through your employer s group plan or your personal insurance benefits may be reduced by the amount of Social Security or other government benefits that maybe paid. A special note for employers If you are your own employer, consider a group policy for you and your employees. If you are a sole practitioner, or if you work for a business that does not provide benefits under a group policy, an individual policy is a good idea. After all, if you do not receive benefits, your entire business may suffer. Whether you are an employee or an employer, your insurance agent can help analyze your sources of disability income, determine waiting periods for various benefits, and determine whether additional coverage would be wise. Will my employer provide disability coverage? Most employers offer some kind of disability insurance, but you should find out exactly what your employer offers before you have to file a claim. Most allow some short-term sick leave, which might last from a few days to as much as six months. In some states, such as Hawaii, New Jersey, New York and Rhode Island, state law requires employers to provide disability benefits for up to 26 weeks. Check with your benefits department to see if you are covered and if so, how long you must wait before benefits begin and how long payments will last while you are still disabled. Also, ask if your employer s disability plan takes other disability programs, such as Social Security, into account when calculating your disability pay. No laws require employers to offer long-term disability (LTD) coverage, but about half of large and mid-sized employers offer it to their workers. Typical group long-term disability benefits replace about 60 percent of the worker s usual salary. These benefits usually start when short-term benefits are exhausted and continue from five years to life. Usually, group long-term disability insurance is fully paid for by employers, with no contribution expected from employees. When you receive employer-paid disability income, you must pay federal and state income tax on the benefits, unless your company pays it for you. Life Events From time to time events will occur in your life that create a need for you to reevaluate your disability insurance coverage. Having a child, getting married, buying a home, 22