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Individual Disability Insurance: Protecting One of Your Most Valuable Assets

When an 18th century poet wrote, "There are worse things waiting for men than death," he may have meant a life unprepared for a disability. A long-term injury or illness can occur at any time, preventing a person from working for months or years. Yet, many people who have without hesitation purchased insurance for their life, car, home and even jewelry, have not yet protected one of their most valuable assets: their earning power. If a disability makes it impossible to provide an income, many of the material goods an individual already has insured could not even be maintained.

Taking no precautions for a disability is like gambling against the odds. An estimated one out of every four people will become disabled during their lifetime. (Health Insurance, 1993) And, a 35-year-old is 3.7 times more likely to become disabled than to die in a given year. (Family Insurance Handbook, 1990).

A disability also can have a devastating impact on a family's finances. Expenses for a mortgage, rent, groceries and other necessities continue and may even rise if a wage earner cannot work. Many people turn to their employers, assuming they will be taken care of by their company's disability plan. Or, they believe that the government-provided Social Security program will cover their expenses. Yet, company group plans often fall short in their coverage and, according to the Journal of the American Society of CLU & CHFC, only 43 percent of those who apply for Social Security benefits ultimately qualify for them.

Even if a person is covered by Social Security, the program rarely pays enough to meet all family expenses (Associated Press, June 30, 1999). Clearly, most wage earners need to take matters into their own hands and explore individual disability insurance coverage.

One of the first steps in this process: find a representative who is both knowledgeable about the types of plans available and is patient and trustworthy in his or her approach. A good representative can help answer questions and explain the differences in the types of disability policies available. Equally important is the insurance company the representative represents. In the past decade, many insurance companies have stopped offering disability products. (Life Insurance Marketing Research Association, 1996) Underwriting concerns and difficulties in managing disability risks have convinced many insurance companies to leave the disability market. Before purchasing a policy, the company's market share, financial strength, financial ratings and commitment for the future should all be considered.

Once a good representative and a reputable insurance company have been chosen, there are a number of factors that affect the policy selected. The most important decision will be the amount of coverage needed. According to Money magazine, disability insurance should cover 60 to 70 percent of a person's income. This figure will vary, however, based on each household's individual needs, finances, other sources of disability coverage and the financial underwriting standards of the insurance company from which they are purchasing the disability insurance. Households with considerable investments, for example, may need less coverage.

In addition, the financial underwriting standards of most insurance companies set the rules about how much coverage they will make available to an individual. This amount depends on an individual's type of occupation and the company's own underwriting rules.

In examining plans, some of the contract definitions you should be familiar with and specific points about those definitions that you should consider include:

• Non-cancelable and guaranteed renewable: With these policies, the company cannot raise the premiums, usually until age 65. The coverage also can't be canceled, and its terms cannot be changed. This type of policy is considered by many to be the best available on the marketplace.
• Elimination period: This specifies the amount of time that takes place until the benefits begin to be paid. Consecutive days of disability should not be required to satisfy the elimination period. The elimination period should be chosen based on an individual's financial ability to wait to receive benefits if disabled. Keep in mind that a shorter elimination period generally means higher premiums. Policy owners should only choose a longer elimination period, however, if they can cover their costs during this period. People who are covered by a short-term group plan may try to time this "waiting period" to begin after their employer-sponsored policy ends.
• Benefit period: The benefit period states the length of time benefits could potentially be payable during a disability. Some short term plans last five years or less. Longer coverage might continue until age 65, when retirement and pension plans typically begin. The most common benefit period is to age 65.
• Definition of total disability: You may want to look for a plan that will pay you a full benefit if you are unable to perform the principal duties of your chosen occupation, rather than one that only pays if you are unable to perform any occupation for which you may be qualified.
• Residual benefits: Some policies pay partial benefits until policy owners are able to return to work full time. This coverage is needed if the policy owner can only return to work part time and, as a result, continues to have a loss of income due to the disability.
• Additional purchase benefit: This benefit, generally offered as an optional benefit at additional cost, allows individuals to purchase more disability insurance in the future, even if they move into a new type of occupation or if their medical condition changes. They only need to prove that their current income is enough to warrant the additional benefit based on the insurance company's financial underwriting standards then in effect.
• Cost of living: With this optional benefit, which is usually added at extra cost, the benefits of the policy increase with inflation each year of the individual's disability.
• Premiums: Premiums can generally be paid on either a level basis, where the amount stays the same from year to year. In addition, some companies also offer a "term" like premium that starts low and increases every year, like a typical term life insurance policy.

Individual disability insurance, by itself or as a supplement to employer-provided group coverage, is essential for anyone who works and relies on that salary. A good representative can help individuals explore the many options available and select a disability insurance plan to suit each person's budget and personal financial needs. The most important step is to make sure a policy is in place. Make sure your income is protected, and in doing so, you can rest assured life can be lived to its fullest.

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