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How can I insure against loss of income?

If you were disabled and unable to work as a result of an accident or illness, what would you and your family do for income?

Disability income insurance, which complements health insurance, can replace lost income. At age 40, the average worker faces only a 14 percent chance of dying before age 65 but a 21 percent chance of being disabled for 90 days or more.

There are three basic ways to replace income:

Employer-paid disability insurance

This is required in most states. Most employers provide some short-term sick leave. Many larger employers provide long-term disability coverage as well, typically with benefits of up to 60 percent of salary lasting from five years to age 65, and in some cases extended for life.
Social Security disability benefits

This can be paid to workers whose disability is expected to last at least 12 months and is so severe that no gainful employment can be performed.
Individual disability income insurance policies

Other limited replacement income is available for workers under some circumstances from workers compensation (if the injury or illness is job-related), auto insurance (if disability results from an auto accident) and the Department of Veterans Affairs.

For most workers, even those with some employer-paid coverage, an individual disability income policy is the best way to ensure adequate income in the event of disability. When you buy a private disability income policy, you can expect to replace from 50% to 70% of income. Insurers won’t replace all your income because they want you to have an incentive to return to work. However, when you pay the premiums yourself, disability benefits are not taxed. (Benefits from employer-paid policies are subject to income tax.)
 
What are the types of disability insurance?

There are two types of disability policies: Short-Term Disability (STD) and Long-Term Disability (LTD):

Short-Term Disability policies (STD) have a waiting period of 0 to 14 days with a maximum benefit period of no longer than two years.
Long-Term Disability policies (LTD) have a waiting period of several weeks to several months with a maximum benefit period ranging from a few years to the rest of your life.

Disability policies have two different protection features that are important to understand.
Noncancelable means the policy cannot be canceled by the insurance company, except for nonpayment of premiums. This gives you the right to renew the policy every year without an increase in the premium or a reduction in benefits.
Guaranteed renewable gives you the right to renew the policy with the same benefits and not have the policy canceled by the company. However, your insurer has the right to increase your premiums as long as it does so for all other policyholders in the same rating class as you.
In addition to the traditional disability policies, there are several options you should consider when purchasing a policy:

Additional purchase options

Your insurance company gives you the right to buy additional insurance at a later time.
Coordination of benefits

The amount of benefits you receive from your insurance company is dependent on other benefits you receive because of your disability. Your policy specifies a target amount you will receive from all the policies combined, so this policy will make up the difference not paid by other policies.
Cost of living adjustment (COLA)

The COLA increases your disability benefits over time based on the increased cost of living measured by the Consumer Price Index. You will pay a higher premium if you select the COLA.
Residual or partial disability rider

This provision allows you to return to work part-time, collect part of your salary and receive a partial disability payment if you are still partially disabled.
Return of premium

This provision requires the insurance company to refund part of your premium if no claims are made for a specific period of time declared in the policy.
Waiver of premium provision

This clause means that you do not have to pay premiums on the policy after you’re disabled for 90 days.
 
How can I purchase disability insurance?

Talk to the agent who sells you your life, health, auto or business insurance—he or she may either sell disability coverage or will be able to refer you to an agent who does.

Your state's insurance department will also have names of agents and companies writing policies in your state.

Make sure that you understand what you are buying and don’t be afraid to ask your agent to explain exactly what is in the policy.

Key things to look for when you shop around

The definition of disability

Some policies pay benefits if you are unable to perform the customary duties of your own occupation. Others pay only if you are unable to perform any job suitable for your education and experience. Some policies define disability in terms of your own occupation for an initial period of two or three years and then continue to pay benefits only if you are unable to perform any occupation. "Own occupation" policies are more desirable, but more expensive.
Benefit period

The benefit period is the amount of time you will receive monthly benefits during your life. Experts usually recommend that the policy you buy pay you benefits until at least age 65, at which point Social Security disability will take over. If you are young, you may consider buying a policy offering lifetime benefits because it will still be relatively inexpensive.
A policy that will replace from 60 percent to 70 percent of your total taxable earnings

A higher replacement percentage, if available, is more expensive. Evaluate your other sources of income before deciding how much disability coverage you need.
Coverage for disability resulting from either accidental injury or illness

An accident-only policy is less expensive but does not provide adequate protection. Ideally, both accident and illness coverage should be purchased.
A cost-of-living increase in benefits

You are buying a policy today that may not pay benefits for a decade or more. Should you need those benefits, you will want them to have kept pace with increases in the cost of living. (Some companies also offer "indexed" benefits, keeping pace with inflation after benefit payments begin.)
A policy paying "residual" or partial benefits

This type of policy is available so that you can work part-time and still receive a benefit making up for lost income. A standard feature in some policies, and added by a rider to others, a residual benefits policy pays partial benefits based on loss of income without an initial period of total disability.
Transition benefits

Offered by some companies, it can offset financial loss during a post-disability period of rebuilding a business or professional practice.
Ongoing coverage

A non-cancelable policy which will continue in force as long as the premiums are paid; neither the benefit nor the premium can change. A guaranteed renewable policy keeps the same benefits but may cost more over time since the insurer can increase the premium if it is increased for an entire class of policyholders.
Financial stability

Check the financial ratings of an insurer. Your insurance agent or company representative should provide this information or check with the following companies, which rate insurance company strength:

  A.M. Best Company, Inc.
Ambest Rd.
Oldwick, NJ 08858
908-439-2200
http://www.ambest.com

Fitch Ratings
1 State Street Plaza
New York, NY 10004
1-800-75-FITCH
http://www.fitchibca.com

Moody’s Investor Services
99 Church Street
New York, NY 10007
212-553-0300
http://www.moodys.com

Standard & Poor’s Insurance Ratings Services
55 Water Street
New York, NY 10004
212-438-2000
http://www.standardandpoor.com

Weiss Research
15430 Endeavor Drive
Jupiter, FL 33478
800-289-9222
http://www.weissratings.com
Waiting period

Every disability policy imposes a waiting period, also known as the elimination period. This is the number of days you must be disabled before receiving benefits. If you are disabled during the elimination period, you will not receive any benefits, even though you are not able to work. If the elimination period is short, such as 30 or 60 days, the premium will be higher. A longer elimination period may strain your finances more when you need it, but you will be charged a lower premium. Most experts recommend that you select an elimination period of 60 to 90 days. The first check is usually paid 30 days after the waiting period.
 
How are disability premiums determined?

Disability premiums are based on your age, sex, occupation and the amount of potential lost income you are trying to protect. In general, the lower the chance that your occupation puts you in harm’s way, the lower the premium. The higher the chance of injury, the bigger the premium. So, for instance, an accountant working in an office would have much lower disability premiums than a construction worker.
 
How can I save money?

There are two ways to keep the cost of disability insurance down:

Electing a longer waiting period before benefits begin

If you have enough resources to cover expenses during the first three months of disability, your premiums will be lower than with coverage that starts after 30 days.
Electing a shorter benefit period

In this case, benefits are payable to age 65—the age at which you would normally retire—instead of for a lifetime. However, choosing a benefit period of two-to-five years, ending before normal retirement age, could be penny-wise and pound-foolish. You might save money on premiums, but you could be without coverage when you need it most. Disability of long duration poses the greatest financial hardship.
 
  Will my employer provide disability coverage?

Most employers offer some kind of disability insurance, but you should find out exactly what your employer offers before you have to file a claim. Most allow some short-term sick leave, which might last from a few days to as much as six months. In some states, such as Hawaii, New Jersey, New York and Rhode Island, state law requires employers to provide disability benefits for up to 26 weeks.

Check with your benefits department to see if you are covered and if so, how long you must wait before benefits begin and how long payments will last while you are still disabled. Also, ask if your employer’s disability plan takes other disability programs, such as Social Security, into account when calculating your disability pay.

No laws require employers to offer long-term disability (LTD) coverage, but about half of large and mid-sized employers offer it to their workers. Typical group long-term disability benefits replace about 60 percent of the worker’s usual salary. These benefits usually start when short-term benefits are exhausted and continue from five years to life. Usually, group long-term disability insurance is fully paid for by employers, with no contribution expected from employees. When you receive employer-paid disability income, you must pay federal and state income tax on the benefits, unless your company pays it for you.
 
Where can I get more information?

For more information on disability insurance, you can contact:

  America’s Health Insurance Plans
601 Pennsylvania Avenue, NW
South Building
Suite 500
Washington, DC 20004
http://www.ahip.org

Department of Veteran Affairs
245 West Houston Steet
New York, NY 10014
800-827-1000
http://www.va.gov/

Social Security Administration
Office of Public Inquiries
6401 Security Blvd.
Room 4-C-5 Annex
Baltimore, MD 21235-6401
800-772-1213
http://www.ssa.gov/
 
 
Insurance Information Institute From http://www.iii.org
 
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