Safety Net: Insurance that Works When You Can’t

I received a phone call not long ago from a client of mine who needed to file a claim on his disability insurance policy.  He and his wife had gone to the movies on one of their bi-weekly “date nights”.  Before the movie ended – while the house lights were still dim -- he got up to get some popcorn, but tripped on a broom an employee had left in the isle.  He ended up falling down the stairs and was severely injured.  Can you imagine?  Who would have thought a date night could end so badly? 

Disability -- More Common than you might imagine.  Let’s face it: Nobody wants to imagine getting sick or hurt.  Nobody wants to think about what life would be like should a disability strike.  But the reality is one in three Americans between the ages of 35 and 65 will become disabled at some point during their working career for at least three months.  And 90 percent of those disabilities aren’t work related and therefore don’t qualify for worker’s compensation benefits.  So what’s a worker to do?   Think about it.  One of your greatest assets is the ability to earn an income. If you were to lose that ability due to a disabling accident or sickness, how would you pay your bills, send your kids to college, and save for retirement?  Mounting medical expenses, coupled with a loss of income can be so devastating that many disabled end up cashing in their retirement plans, losing their homes or filing bankruptcy. 

Insuring your income:  People naturally think about purchasing insurance to protect their homes and their cars, and rightly so.  But more importantly, people should first look to insure the very thing that pays for everything else -- namely, their paycheck!  If you’re self-employed, have a family, are the primary bread-winner, and have more years to work before you’re able to comfortably retire, you should carefully review your disability insurance coverage.

Do you have group disability insurance?  The good news is that most employers offer some form of group disability coverage.  Start your insurance review by obtaining a description of your company’s plan from your human resource department.  A typical group plan offered by an employer will replace up to 60% of your salary.  But the amount may actually be far less than that. That's because most group plans have a benefit cap of, say, $5,000 a month or $60,000 a year.  Another surprise for many is that bonuses don't usually make it into the equation -- a group plan will only insure your regular salary.  Ideally, benefits will typically be paid until you reach retirement age, but some group plans will pay for a set number of years (say five years, for example). 

Do you need your own disability insurance policy?  If your company doesn’t offer disability insurance, or if you believe you need to supplement your coverage, work with an independent insurance broker or CERTIFIED FINANCIAL PLANNER ™ to evaluate your options.  All disability income insurance policies are not alike.  When shopping for a policy, consider the company’s financial stability.  In addition, know that policies can differ in how they treat partial or recurring disabilities, how they make adjustments for inflation, and how different occupations are underwritten.  Here are a few of the basics you should consider:

• Definition of disability. Unlike life insurance which pays benefits when an insured is no longer alive, disability insurance pays benefits only when an insured meets the definition of disability.  Not all policies are the same; one might pay benefits is you are unable to perform the duties of your own occupation while another policy would not pay benefits unless you couldn’t work in any occupation.  

• Amount of monthly coverage. You can purchase disability insurance that will replace a certain percentage of your income —normally up to 70% or 80% of your pre-disability income.  You should purchase coverage that will enable you to meet your monthly financial obligations.

• Waiting period. The waiting period represents the amount of time that must pass between the date you become disabled and the date that disability income payments begin.  Be sure to coordinate your waiting period with short-term disability insurance or your emergency fund reserves.  In other words, a six month waiting period may be fine, unless you only have three months of income set aside as an emergency fund.

• Benefit period. The benefit period can range from several months to life. The longer the benefit period, the higher the cost of insurance.

About this column: Steve Davis is a local CERTIFIED FINANCIAL PLANNER™ who has been helping clients in Mansfield, Foxboro, Easton and other local communities for more than twenty years.   You can find out more about Steve and his company, Davis Financial at www.talkwithdavis.com  or on Facebook at www.facebook.com/davisfinancial 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  Securities offered through LPL Financial Member FINRA/SIPC