If you must work in order to earn your income, you need to have disability insurance. That said, purchasing such insurance is a “buyer beware” situation. This is because when it comes to most disability insurance policies, you must be aware of the numerous pitfalls that come with acquiring coverage that will really work for you and your family, if and when you need it. This week’s article covers what you need to know to get the best coverage possible.
What Is Disability Insurance?
A disability insurance policy pays benefits when you are unable to work because you are sick or injured. Most disability policies pay you a benefit that replaces a percentage of your income when you can't work due to illness or injury. Disability insurance is not the same as health insurance, as it will not cover your medical bills. Instead, disability benefits are designed to replace a percentage of the income you lose due to your inability to work, so you can cover your basic financial needs, such as paying bills, covering household expenses, and providing for your family, until you are able to return to work. Should I Get Disability Coverage?
You might think you don’t need disability insurance, especially if you’re young and in good health. Hopefully, you’re right. Unfortunately, becoming sick or disabled can happen to anyone at any time, whether it’s from a serious accident, illness, or as with most people, as we get older. And this threat to your health isn’t specific to the most recent diseases; it has always been true. In fact, according to the U.S. government’s statistics, one in four 20-year-olds become disabled before reaching retirement age. That makes it all the more important that you consider how to protect yourself and your family’s well-being with disability insurance. When shopping for a policy, it’s best to work with an insurance agent who can survey many different companies to help you choose the right policy for your budget, age, health, and other risk factors. And remember, you must have the insurance policy in place before something happens. If you’re already sick, you can’t buy disability insurance to make up for lost income. Additionally, when shopping for disability coverage, always check out the “claims paid'' rating of the insurance company. This is a measure of the percentage of claims they pay compared to the ones they deny, and it’s a good indication of the company’s quality. Of course, you should also search online for reviews of the company as another measure of the company’s reputation. In addition to these considerations, disability insurance comes with a huge array of different options and types of coverage. With so many different things to consider, it can be hard to tell what is necessary and what isn’t. While you should meet with us, your Family Business Lawyer™ to discuss the disability coverage that best fits your situation, here are some key factors to consider when choosing a disability insurance policy.
The Definition of Disability
There are many different ways to define disability. In fact, most dictionaries include more than five definitions of the word. So be sure you fully understand the definition used by your insurance provider. Most policies have a two-tiered definition of disability.
With most policies, the disability standard will be defined as the insured worker being unable to perform the duties of their “own occupation.” This refers to the job they were performing at the time they became disabled.
After a defined period of time, usually 24 months, the standard of disability will shift to a different level, known as the “any occupation” standard. This is defined as the insured worker being unable to perform any occupation. In other words, the any occupation standard means the worker has to prove they are unable to work at any job, regardless of whether it’s the one they were hired to do.
Under the any occupation standard, which is offered in many policies, the worker must still be able to earn some percentage of their former salary. Usually, the percentage is 60% to 80%. Note that many employer-provided disability policies are only available with the any occupation option, though employees may purchase a supplemental disability policy for additional protection.
Types Of Coverage
There are two main types of disability insurance: short-term disability coverage and long-term disability coverage.
Short-Term Disability Insurance
Short-term disability insurance normally lasts between 3 to 6 months, and sometimes up to a year or more. It covers about 60% to 80% of your monthly gross income. The premiums you pay ranging from 1% to 3% of your annual income.
The percentage of your income the policy pays depends on what kind of health risks the insurance company determines you have. If you smoke, for instance, the premium will probably be higher, just like with many health insurance policies. If you have a risky job, such as working with heavy machinery, premiums will likely be higher as well.
One major upside to short term policies is that payouts usually happen within two weeks, which can be a lifesaver in an emergency. Long-Term Disability Insurance
Long-term disability insurance can pay benefits for a few years or until your disability ends, which may even be when you reach retirement age. Most policies cover 40% to 60% of your monthly gross income, but ones that pay up to 70% do exist. These policies also cost 1% to 3% of your yearly income, but based on the benefits they provide, they tend to be more cost-effective in the long run. A major difference between the two forms of insurance is that it can take up to 6 months to see a payout from a long term policy, which may not be an realistic option, when you need money immediately to cover basic living expenses. Despite the lengthy payout times, we recommend getting a long term policy whenever possible. This is due to the fact that such policies will last through a long recovery or treatment period, which can be invaluable if you are seriously ill or injured and cannot work. Additionally, look for a “non-cancellable insurance policy,” which will keep the insurance company from canceling your policy if you have any health changes. Keep in mind that even the best long-term disability policies only pay a percentage of your income, so make sure to have enough savings to cover the difference. Most financial experts recommend setting aside an emergency fund that will cover your expenses for between 3 to 6 months. Indeed, such savings may be an alternative to purchasing a short-term disability policy, so consider your options to determine what makes the most sense for you. Coverage Options
The following are a few of the most common options offered through disability insurance. However, depending on your insurance provider, such options may vary considerably or not be offered at all. Portability
If you purchase your disability insurance through your workplace, ask if you can keep that insurance if you leave the company. If your insurance is non-portable, it will not follow you if you leave your job.
Having a portable insurance policy gives you peace of mind that you will be covered no matter where you work. Although many disability policies purchased through an employer are not portable, it is definitely something you should look into. If portability is important to you, you can consider purchasing disability insurance on your own.
Premiums also vary depending on the insurance provider. Some policies allow you to lock-in a premium, while others do not. Renewal options can also vary greatly, so be sure to choose the one that suits your situation best.
A “guaranteed renewal” allows you to renew without making any changes to your coverage, but your premium can fluctuate. A “non-cancelable” policy means your coverage and your premiums cannot be changed, assuming you are paying your premiums on time. Also, be sure to find out if premiums are waived during a qualified disability.
Given the above considerations, the best disability insurance policies will be non-cancelable and guaranteed renewable, but obviously, they will cost more, so consider what’s best for you when choosing your policy options.
Cost of Living Benefits
Cost of living benefits are not included in most policies. But adding this rider is definitely something you should consider. Cost of living benefits are meant to provide financial stability by offering an increasing benefit to keep pace with inflation and other factors that increase cost of living expenses.
When choosing cost of living benefits, consider choosing one that increases on a compounding basis. Compound interest is earned on the principal and the interest. This additional rider can help your benefits keep pace through inflation even after your disability ends.
Another option to consider adding to your disability insurance are residual benefits. Residual benefits will help you make up your income if you can only work part-time, which can make these benefits extremely valuable.
Be careful, as some insurance companies commonly put restrictions on residual benefits or tweak the definition to their liking, so be sure to read the fine print to ensure you don’t encounter any surprises down the road.
Many policies can be changed by the insurance company at any time over the course of your coverage. This allows insurers to raise your coverage rates whenever they want, whether your policy is up for renewal or not.
Likewise, insurance companies could change the terms of your insurance coverage without letting you renew. This makes it imperative to understand when and how changes can be made to your insurance, so be sure to ask about such changes before getting your policy.
The future increase option rider is an addition to your disability coverage. However, it is worth considering if you think your income may increase over time.
With this additional rider, you are able to increase the monthly benefit of your policy, regardless of your health status. Without this rider, your policy will not protect your future income whatsoever. However, many insurance companies will limit the total of supplementary coverage that can be implemented each year.
Get Our Support Before Making Your Decision
As with most insurance coverage, disability policies can be complex and confusing. To help you consider your options and get the best possible coverage, before meeting with an insurance agent, consult with us, your Family Business Lawyer™. We can offer you trusted advice to ensure you get the best coverage for your investment. Contact us today to schedule an appointment!
This article is a service of Hanson Legal and Milan Hanson, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us at 541-776-3405 today to schedule!