Disability Insurance, General

Insurance Q.& A. : Disability Insurance, General

What is disability insurance?

Disability insurance is insurance that's designed to protect your income and thus your standard of living. If you become disabled, you probably won't be able to earn much income but you will continue to have living expenses. Your monthly outlays could even rise, especially if you need paid help at home, can no longer drive, or have to pay for prescriptions or therapy that aren't completely reimbursed by your medical coverage. Disability insurance will provide monthly payments to help you meet your daily living expenses.

What's the difference between worker's comp and disability insurance?

According to "Get a Financial Life" (Simon & Schuster Inc., New York), "'Worker's comp,' as it is known, protects you if you are injured while performing your job. Disability insurance covers you for any injury or illness, whether it happens at home, on vacation, or on the job. If you're lucky enough to work for an employer who provides you with disability insurance, you should assess exactly how much you're protected." For example, if your employer provides coverage that will pay you for only 30 days if you are unable to work, you might want to buy a supplemental policy that will pay after the first 30 days have passed.

Who needs disability insurance?

Most people need to have some sort of disability insurance, which will provide them with money in case they can no longer work. When people without disability insurance become disabled, their income stops and their life savings are drained shortly thereafter. There are, of course, some exceptions to this rule. For example, if you're married and both of you work, one of you may be able to skip disability coverage if the family could maintain its present lifestyle on the other's paycheck. You probably don't need disability insurance if you are a full-time homemaker or student, either.

Why do I need disability insurance? Doesn't my employer have to keep paying me if I get hurt while NOT on the job?

Through worker's compensation, employers must usually continue paying a worker who gets hurt on the job, but most don't have to pay anything if the injury or illness was incurred outside the workplace. According to "Get a Financial Life" (Simon & Schuster), in 1996 "only Puerto Rico and five states-California, Hawaii, New Jersey, New York and Rhode Island-require employers to provide income to disabled employees who get hurt off the job. And federal disability benefits from Social Security are extremely difficult to get; the majority of people who apply are rejected." As a result, you should seriously consider purchasing private "disability insurance" that will pay you if you are too sick or injured to work, regardless of whether the illness or injury is job-related.

Do I need disability insurance coverage even though I'm single?

Just about everyone needs disability insurance that will help pay their bills if they are injured or become too sick to work. Single people aren't exempt from this basic rule. According to "The New Century Family Money Book" (Dell Publishing), "Singles do not have the luxury of falling back on a spouse's income in the event of an under- or uninsured disability. Therefore, maintaining sufficient disability insurance is particularly crucial." Most married couples also need disability insurance coverage, unless both spouses earn a relatively large amount of money and could still "get by" comfortably if one of those incomes suddenly disappeared.

Do I need to buy disability insurance if my employer has a Section 105 contribution plan?

If you work and become disabled, you may be able to collect some or all of your regular salary if your employer participates in a Section 105 contribution plan. A Section 105 plan is a "salary-continuation" program. Under such a program, the employer continues making regular wage payments -- in part or in full -- to an employee who becomes disabled and can no longer work. If your employer provides such coverage, you may not need to purchase disability insurance of your own. Or you might choose to purchase an additional policy for a relatively low cost that supplements the coverage provided by your employer's plan.

How much disability insurance do I need?

Determining how much disability insurance you need is relatively easy. You need enough coverage to provide you with sufficient income to live on until you either go back to work or other financial resources (such as Social Security disability payments) become available. According to "Personal Finance for Dummie$" (IDG Books Worldwide, Foster City, Calif.), "If you don't have much saved in the way of financial assets and you would want to continue with the lifestyle supported by your current income, get enough disability coverage to replace your entire take-home (after-tax) monthly income. The benefits you purchase on a disability policy are quoted as dollars per month that you receive if disabled. So if your job provides you with a $2,000-per-month income after payment of taxes, then you ask for a policy that provides a $2,000-per-month benefit." In addition to the monthly coverage amount, you also need to select the length of time you want to be able to collect benefits. You need a policy that will pay benefits until an age at which you become financially self-sufficient. For most people, that's around 65.

Can I be covered by more than one disability policy?

As with life insurance, you can buy more than one disability insurance policy. In fact, it sometimes makes sense to purchase more than one disability policy. For example, you may want to purchase two policies that cover different disability situations. Or, you might be able to save money if you buy one policy that will provide benefits for only a few months with no waiting period, and a separate policy that will provide long-term benefits only after you have been disabled for a certain length of time.

What is the maximum benefit I can receive if I own one or more disability policies?

Usually, the maximum income you can protect by disability income insurance is 65 to 70% of your gross earned income. Companies make every effort to avoid a benefit that is greater than the after tax income of the insured.

What features should I look for in disability insurance?

Here is some advice about the key areas to examine, from "Personal Finance for Dummie$" (IDG Books Worldwide Inc., Foster City, Calif.): 1. Definition of disability. An own-occupation disability policy provides benefit payments if you cannot perform the work you normally do. Others pay only if you are unable to do work for which your are "reasonably trained." 2. Noncancellable and guaranteed renewable. These features guarantee that your policy can't be canceled because of poor health. If you buy a policy that requires periodic physical exams, you can lose your coverage just when you are most likely to need it. 3. Insurer's financial stability. It's generally best to stick with companies that get top ratings from independent rating firms, although your state or another insurer may come to the rescue if your own insurer can't pay. 4. Waiting period. This is the lag time between the time a disability is incurred and the time payments start being made. The shorter the waiting period, the higher the premium. 5. Residual benefits. This option pays a partial benefit if you have a disability that prevents you from working full-time. 6. Cost-of-living adjustments. They help the benefit payment keep pace with inflation. 7. Future insurability. It allows you to buy additional coverage, regardless of your health. This option costs extra, and most people don't need it.

What are the residual benefits of a disability insurance policy?

A residual disability insurance policy provides disability payments to you if are working but suffer an income loss as a result of your inability to work full-time or your inability to perform all the duties that you routinely performed prior to your disability. According to "Wealth Enhancement & Preservation" (The Institute Inc., Denver), "Generally, residual benefits are payable when your income loss is 20% or more and you are under the care of a physician. The amount of benefits that you receive is in direct proportion to your income loss. For example, you return to work but are earning 40% less than before your disability. In this case, you would be eligible to receive 40% of your disability benefits. Most residual disability plans provide a minimum benefit of 50% of covered compensation." It's important to note that some policies define residual disability simply as a loss of income, while others require a loss of income and a loss of time or duties. Other contracts combine these elements, requiring a loss of time or duties during the elimination period only.

What is meant by the waiting period in a disability policy?

Many disability insurance policies have a waiting period that requires a certain number of days to pass before the disability payments start flowing. Usually it is 60 to 90 days. A few have no waiting period at all, while some have periods as long as two or three years. If you're paying for the policy yourself-rather than the company buying it for you-you will probably get to pick the length of time you want the waiting period to last. The shorter the waiting period, the higher your premiums.

How does the definition of disability affect my benefits?

There are different definitions of disability which you should understand if you're looking for a disability insurance policy. The definition used in your particular policy will determine the circumstances under which you will be able to collect payments, and possibly even decide whether you can go into some other line of work without losing your disability benefits. Under the own occupation definition of disability, total disability benefits are payable if you become unable to work at your specific job or career. But if you go out and start a new career or get into a new line of work, you may be able to collect both a paycheck and disability payments. With the modified own occupation definition, benefits are payable to you if you are unable to perform the duties of your occupation and do not work in another occupation. The decision to work in another occupation is made by you, not the insurance carrier. Finally, some policies will pay you only if you are unable to perform a job for which your are reasonably trained. These policies tend to have the lowest premiums because payments will kick in only under limited circumstances.

Where can I buy disability insurance?

Several companies offer insurance that will pay you if you become disabled or too sick to work. If you're single, you probably should purchase a disability policy because you don't have a spouse to support you if you cannot work. Many married people need coverage too, especially if one spouse doesn't earn enough to support the family if the other becomes incapacitated. Your employer may offer a disability plan, as do many trade and credit unions. And most large insurance companies sell disability coverage. Stick to those rated "A or A-plus" by A.M. Best, the big insurance-rating firm, to ensure that the company will be able to pay your claim if you ever have to lodge one. Your employer may offer a disability plan, and so do many trade and credit unions

How do I shop for disability coverage?

Disability rates and coverages vary greatly from company to company. Therefore it is important to shop around. Simply ask for quotes from the agents you know and trust as most of the large, old-line companies sell disability and are pleased to quote rates.

Will lifetime coverage on my disability insurance policy cost a lot more than coverage to age 65?

No, it will cost only a little more, 5 to 10%.

What type of financial information does a company need to underwrite disability income insurance?

When you apply for disability insurance coverage, don't be surprised when the insurance company starts asking questions about your income and investments. The company needs this information to verify your earnings and to help ensure that you have an appropriate amount of coverage. The insurance company also will ask you to list all the taxable income you receive, including salary, wages, fees, commissions and draws. You may have to provide documentation, including copies of W-2 forms and possibly even your entire income tax return.

What medical information does an underwriter use in evaluating my disability income application?

In addition to information concerning your income and investments, a company that agrees to provide you with disability insurance will also require that you provide it with a fairly detailed accounting of your medical history. In addition, you will also probably have to take a physical exam. The exam will include blood and urine tests, as well as a statement from the attending physician. Disability claims have been skyrocketing, so your employer or insurance agent will also be required to submit certain information about you as well.

If I purchase a disability income policy, can I take a tax deduction for the premiums?

If you purchase the policy on your own, the Internal Revenue Service will not allow you to deduct the annual premiums. However, if you eventually become disabled and begin to collect benefits, the money you receive from such a policy will not be subject to federal income taxes. If you purchase disability insurance through your employer, you may be able to have the premiums deducted from your paycheck on a pre-tax basis. If this option is available, it's usually wise to take it: By using pre-tax dollars, you will lower the earnings your employer will report to the IRS and thus lower the taxes you must pay, however any benefits you receive will be taxable.

Can disability premiums be deducted from my paycheck and paid with pre-tax dollars?

If you purchase disability insurance through an employer's group plan or individually, you may be able to have the premiums deducted from your regular paycheck using pre-tax dollars if your employer offers a Section 125 cafeteria plan. If this option is available, take advantage of it. By using pre-tax dollars, you will reduce the amount of income that your employer reports to the Internal Revenue Service. In turn, you won't owe as much in taxes. However, should you become disabled the benefit will be taxable.

Are disability benefits taxable if I pay my disability premiums with pre-tax dollars through my employer?

Yes, disability premiums paid by your employer or by you on a pre-tax basis result in the benefit being taxed.

Are disability benefits taxable if I pay the premium through a Section 125 cafeteria plan?

The disability benefits are taxable if the premium is paid by your employer or if you pay the premium before-tax through a Section 125 plan.

What is a cafeteria (Section 125) plan?

A cafeteria plan, also known as a Section 125 plan, is an employee benefit plan governed by the provisions of Section 125 of the Internal Revenue Code. Its purpose is to provide a method for allowing the employee to choose from among a menu of choices (hence the name) those benefits the employee desires to utilize. The benefits may be fully or partially paid for by the employer. If the employee is required to pay for some or all of the benefits, he or she typically pays for them on a pre-tax basis.