People are not naturally interested in disability insurance, however it is critical for a lot of workers. 1 out of 3 employees aged 35 to 65 will be out of work because they suffered an injury or got ill for 3 months or more at some point in their career, according to the Social Security Administration.
If you couldn’t work, how long would it be before your savings are depleted and you start to dig yourself into debt? If the answer is troubling, you may want to consider a disability insurance policy for financial protection.
Problem is, shopping for one can be a frustrating and confusing task. Here are some basic tips to get you started.
1. Do I need disability coverage?
Disability can happen to anyone unexpectedly, and it’s likelier to be caused by illness than injury, said Barry Lundquist, president of the Council for Disability Awareness, a nonprofit organization of insurance providers who represent 75% of the commercial disability-insurance market.
“People generally first think of disability in terms of catastrophic causes—a car accident that leaves one a quadriplegic in a wheelchair or very serious one-time events such as strokes or heart attacks,” he said. “Those things do cause disability, but a lot of claims are caused by fairly common, more chronic stuff.”
Diseases of the musculoskeletal system and connective tissue ranked highest, accounting for more than 30% of disability claims to CDA member companies in 2010. Ailments included arthritis, herniated or degenerated discs, back pain and spine or joint disorders. Next on the claims list were nervous-system and sense-order diseases (13%), circulatory system diseases (13%) and cancer (8%).
“The whole purpose of insurance is to protect people against catastrophic risk, the kind of risk that can financially devastate you,” Lundquist said. “You may be able to afford to replace a lost cellphone, but [one’s] income is almost everybody’s most valuable resource.”
Disability policies come in two main types. Short-term disability insurance, which includes many employer-provided group plans, generally only provides financial protection for three months to two years. The most sought-after long-term disability plans have benefit periods that last until age 65 when Social Security and retirement plans kick in.
2. Am I eligible for a group plan from my employer?
Find out whether you have access to coverage in a group plan through an employer, trade association or other group. If you’ve already opted for this benefit, is the coverage you have sufficient and are there restrictions on that plan?
For most Americans, shopping for an independent policy is the only option. Only 32% of working Americans have access to a group disability insurance plan through their employer, according to the U.S. Bureau of Labor Statistics.
Among those employees who do have coverage, fewer than half said they knew its cost (41%) or what benefits it provided (47%), according to a recent national survey of about 1,200 workers commissioned by the Consumer Federation of America and employee benefits provider Unum.
If your employer doesn't offer group disability, team up with fellow employees to petition to have group disability added to the benefits package, said Stephen Brobeck, CFA’s executive director. Especially if employees are willing to pay a full premium, many companies will be willing to consider it, he said.
3. How much coverage do I need, and for how long?
Two key terms when selecting a disability insurance policy are “elimination period”—how long a person has to be totally disabled before benefits will pay—and “benefit period,” which refers to the length of time of the claim, said Wendy Herndon, second vice president, product development, for Aflac, the Columbus, Ga.-based carrier of short-term group and individual disability plans.
“If someone has enough money in savings to last three to six months, they should consider a longer elimination and a longer benefit period,” she said. “But you should sit down and consider how long you can go without a paycheck, which is not very long for most people in today’s economy.”
A typical group disability plan will replace 60% of the policyholder’s salary, while individual plans may pay 70% to 80%, said Matthew Herz, managing partner at West Hartford, Conn.-based Herz Financial, which operates JustDI.com, a national wholesale distribution network for disability insurance agents.
Disability benefits are taxable when premiums are paid by an employer, reducing the amount you receive, he noted.
Because of the taxability of benefits and the fact that group contracts can be canceled, higher earners especially will want to consider whether they’d do better with their own independent coverage, which will be portable if they change jobs, said Robert Tuzzo, president of Edison, N.J.-based Total Financial Concepts, which specializes in advising physicians on money matters.
Another thing to keep in mind while making calculations is that, while about 72% of individuals who received long-term disability insurance from CDA-member companies in 2010 also qualified for Social Security Disability Insurance (SSDI), the annual payout averages only $13,000 annually.
4. Other considerations
Whether or not you decide upon a group or individual policy, a few more factors will determine whether you are able to collect benefits if you need them.
Most advisers recommend an “own occupation” policy, which covers you if you cannot perform your current job, versus “any occupation,” which means no payout if you can perform any job at all, Herz said.
You also want to ask if a policy is “noncancellable,” which means terms and premium amount are locked as long as you pay on time, or “guaranteed renewable,” where terms remain the same but the insurer can raise the premium, he said.
Whether you qualify for either of the latter options is likely to depend on your job. Some occupational classes, such as contractors, truck drivers and chefs, are considered by insurers to be at higher risk of injury or health problems than office-desk employees, and generally are only eligible for policies with greater restrictions, Tuzzo said.
Read the fine print on pre-existing condition exclusions and waiting periods, and find out whether your plan will issue a residual benefit if you still are able to perform some of your job’s tasks, he said.
For example, “you’re a gastroenterologist with a herniated disc and you can’t do endoscopies and colonoscopies,” Tuzzo said, “but you can still work in the office.”