Disability Insurance Can Save Your Life

By Ginger Applegarth

When a physical injury keeps you from working, this will help pay the bills -- to a point.

Ask any financial planner or insurance agent what risk could be called "the forgotten risk," and, chances are, the answer will be disability. Their clients often come in the door questioning whether they have too little, too much or the right kind of life insurance, but rarely have they thought about how they could survive financially with no earned income.

In reality, disability insurance is as important as (and in some cases, even more important than) life insurance.

Facing the numbers

At any given age, the odds of becoming disabled are much higher than the odds of dying. Every year, 12% of the adult U.S. population suffers a long-term disability. One out of every seven workers will suffer a five-year or longer period of disability before age 65, and if you're 35 now, your chances of experiencing a three-month or longer disability before you reach age 65 are 50%, according to the National Association of Insurance Commissioners (NAIC). If you're 45, the figure is 44%.

These odds would not be a problem if people had substantial savings that could be drawn on in the event of a disability. But that's rarely the case, and any money that has been set aside has likely been earmarked for goals such as college or retirement. In a 2007 NAIC survey, 56% of adults said they would be unable to meet their expenses if they couldn't work for a year.

'A living death'

Disability is called a living death for good reason.

First, suffering a disability would be a catastrophic event for you, your family, your friends and your co-workers. It would create enormous emotional pressures for the family because your role would change and you would have physical needs to be met. There would be enormous financial pressures that would exacerbate those emotional pressures. You would witness firsthand the impact that your disability planning -- good or bad -- would have on you and your family.

Harder to get

To complicate matters, fewer employers offer disability insurance than life insurance, and it's much harder to qualify for individual disability coverage than for individual life insurance. The bottom line is that if you're working and you need your income to live, you need disability insurance.

When you apply for disability insurance, the insurance company will tell you if you have too much money to qualify for coverage. That's because, unlike life insurance, you can't buy all the disability insurance you may need. Usually, you can get a maximum of 60% of your monthly earned income before taxes. (Unearned or investment income does not qualify, because it presumably continues even if you are disabled.) The limit is in place so as not to deter people from returning to work.

Social Security disability coverage

If you are working, you may already have some disability insurance, even if you haven't thought of it that way. It's called Social Security. Social Security provides disability income as well as retirement income. However, it's very difficult to qualify for the benefits. More than 80% of the applicants fail the first time around. Some hire lawyers to help in the appeals process.

You can get an estimate of your Social Security disability benefits online. Just as with retirement benefits, your disability income is dependent upon your "covered earnings," or the amount on which you are taxed for Social Security. Because they're so hard to come by, don't count on the benefits when you evaluate your disability income needs.

Workers' compensation

The second kind of disability insurance you may already have is workers' compensation. Many employers are required to provide this coverage, although the amount and duration of monthly benefits varies by state. This kicks in if your disability is job-related. Payments typically last for a few years and tend to be low.

Just as with Social Security disability payments, it's wise to think of workers' compensation as a nice "extra" if you qualify, but don't count on it.

Variables in coverage

Insurance is always complicated, and disability is no exception. There are all kinds of disability policies and permutations. However, the basics are simple. The first variable is the amount of monthly benefit. Most disability policies have a fixed monthly benefit that does not increase with time. You can purchase extra coverage, or riders, that offer higher payment schedules.

The second variable is the definition of disability -- whether it is "own occupation" (the inability to perform the duties of your specific occupation) or "any occupation" (the inability to perform the duties of any job for which your education and training make you qualified).

The third variable is the waiting period, or the amount of time you must be disabled before benefits kick in. These waiting periods can range from one week to two years. The longer you wait, the less your disability policy will cost.

The fourth variable is the benefit period, or how long you will receive monthly benefits once your policy starts paying. The benefit period can range from six months to life, depending on what you choose and what your insurance company is willing to offer you.

Other options

In addition to these variables, there are other coverage options, as well as a variety of riders. The most important is a rider that pays if you can return to work only part time.

The Social Security offset rider guarantees that if you qualify for disability payments under your insurance policy but not for Social Security (a frequent occurrence), your disability policy will pay what Social Security should have.

You may also want to consider the additional-purchase option, which guarantees you the right to buy additional disability insurance in the future, regardless of your health at that time.

Start with your employer

So, you've decided to evaluate your disability-insurance needs. The first place to check is with your employer. Just like other types of insurance, group coverage is much less expensive than individual policies. Your employer may pick up part or all of your disability premium.

When you check out your employer's coverage, keep these rules in mind: If it doesn't cover at least 60% of your income, doesn't pay benefits to age 65 and has a waiting period longer than your savings can last, you need to look into private insurance as well. Individual disability policies are not cheap, but you can't afford not to have them if you need them.

Buying on your own

Individual policies can vary enormously. The monthly amount for which you can qualify, the price and the benefit period amount all depend upon the hazards of your occupation. If you are an attorney, your disability insurance is going to be cheaper than if you are an electrician. Your physical and mental health are factors as well. Even a few visits to a therapist for family counseling may make you ineligible for a policy without a "mental illness" exclusion.

Individual disability insurance is getting harder to obtain, but here are some rules of thumb:

• Get the highest monthly benefits for which you can qualify.

• Try to get "own occupation" coverage for life. Many insurers now only offer the "any occ" coverage, which could force you into a new line of work.

• Get the longest waiting period you can afford. A policy with a six-month waiting period is much less expensive than one with a two-week waiting period.

• Get coverage for the longest benefit period possible. The goal is age 65 or even for life, but if your choice -- imposed by the insurance company or by your pocketbook -- is a higher monthly income or a longer benefit period, opt for the longer benefit period.

Reproduced with permission of MSN Money.com, from Disability Insurance Can Save Your Life, Ginger Applegarth, 2008; permission conveyed through Copyright Clearance Center, Inc.