When you start a new job, or your employer holds its annual open enrollment period for employee benefits, you have an important financial planning opportunity. Many people focus on a company retirement plan as the primary benefit. But don’t overlook risk protection offerings. After health insurance, one of the important items to consider is long-term disability insurance.
Disability insurance provides you with a percentage of your take home pay if you are unable to work. Group plan coverage is easy to get. No medical exam is required to qualify for coverage. However, there may be limits on how much insurance you can purchase and what level of disability is covered.
For many employees, it could be smart to purchase this coverage. For others, it may be more appropriate to work with an insurance agent to design an individual disability policy that better fits the specific financial situation and insurance need. It may be possible to qualify for less-expensive premiums as well. Of course, for self-employed people who design their own benefits with personal choices, disability protection can be even more critical.
Whether you’re looking for income protection through a corporate benefit or covering risks on your own, ask yourself these seven questions to decide what type of policy is best for you:
1) Do I need this insurance? Over your working life, the likelihood of having a disability of three months or more is dramatically higher that the probability of dying. According to the book Planning for Business Owners and Professionals, if two 35 year olds establish a business and keep that business until they are 65, there is a 75% likelihood that at least one of them will sustain a long-term disability before they retire.
2) What type of definition of disability coverage do I need? A disability policy may use one of three definitions of disability:
- Own Occupation – you are disabled if you cannot perform the same duties that you currently perform for your employer. This is the strictest definition and the best for the consumer because your disability checks will continue to be paid until the terms of the policy run out, or you can return to work doing the exact duties that you do now.
- Any occupation for which the insured is reasonably suited – if you can do similar (but not the same) tasks for the employer as you did before the disability, then the disability payments cease.
- Any occupation – If you can do any occupation, the disability payments cease.
3) What type of continuance provision do I need? With a company provided disability policy, your coverage amount and rates will change each year based on your age and your income. If you bought an individual disability policy you can choose from a range of options for the cancellation of the insurance, and the insurance pricing that is available. From the policy holder’s perspective, the provisions from best to worst are:
- Noncancelable. These policies cannot be cancelled before the insured is age 65 and the rates are guaranteed for the entire period.
- Guaranteed renewable. These policies also cannot be cancelled by the issuer, but they can raise the rates on the policies.
- Cancelable or renewable at the insurer’s option, or conditionally renewable. These policies allow the insurance carrier to cancel or raise rates each year at their option.
4) What will happen to the disability policy if you stop working for your employer? Often, the insurance carriers will allow disability policy holders who separate from their employers to convert their group policy to an individual one. Unfortunately, the rates for these conversions are often much higher than can be found through an individual policy and they are not guaranteed.
5) What are the benefit limits of the policy? Often, the maximum benefit available through an employer provided disability plan is lower than if you purchased an individual policy.
6) What is the elimination period? The elimination period is the time between the illness or injury and the beginning of the payment of benefits. Common elimination periods are 60, 90 or 180 days.
7) What is the disability carrier’s policy about successive disabilities? Occasionally, a person will become disabled, and will file a claim and will then go back to work and stop taking the disability payments. Sometimes, that person has a relapse, and has to go back on disability. Some disability carriers will consider this as one disability, and will not require a second elimination period before benefits are started again. Other carriers will consider this two different events and will require a second elimination period.
The type of work you perform will impact the level of premiums you pay for disability protection. Depending on your profession, your health and the level of coverage you desire, a policy can be crafted to fit your specific need for risk protection.
~ BHJ Wealth Advisors — Gig Harbor, Washington