Disability Insurance - Don’t ignore the facts
Joshua in Insurance
Mar|30|2008
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My wife and I have been talking about insurance. Health insurance, life insurance and disability insurance have all come up. Most people I know have health and life insurance, but very few people I know have disability insurance.
What is a disability?
Different disability programs have varying definitions of a disability. The State of California defines a disability as follows: “…any mental or physical illness or injury which prevents you from performing your regular or customary work. This includes elective surgery; illness or injury resulting from pregnancy, childbirth, or related conditions; or inability to work due to a written order of quarantine from a state or local health officer.”
The Social Security Administration has a very strict definition of a disability: you cannot do work that you did before; you cannot adjust to other work because of your medical condition(s); and your disability has lasted or is expected to last for at least one year or to result in death.
Some facts:
- A 20-year-old worker has a 3-in-10 chance of becoming disabled before reaching retirement age (according to the Social Security Administration).
- Forty-three percent of all people age 40 will have a long-term (lasting 90 days or more) disability event by age 65 (according to the Insurance Information Institute).
I think that anyone who contributes substantially to your family’s income should consider disability insurance. There are a few ways to replace income if you suffer a disability:
- Employer-sponsored coverage. I am covered through my employer and I thought this coverage would be enough. However, because my employer pays the premiums I may be taxed on any benefits I receive. This would take a bite out of much funds.
- Social Security disability benefits and/or state disability programs. For me, Social Security definition of a disability is so strict that I can not count on this replacing any income.
- Private insurance companies
When considering private disability insurance, there are some things to be aware of. The following was taken from the Insurance Information Institute:
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.
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