Making sure you have disability insurance

October 23, 2016

A recent column warned of the dangers of disability. It gave some statistics, the most interesting of which stated that disabilities are not often the result of freak accidents or injuries on the job, but rather illnesses like cancer, heart attacks and diabetes. To make a medical analogy, these are the symptoms and the cure is disability insurance. This column is about finding the cure.

The first place to look is through your employer. What are the benefits of buying a policy through your employer? It’s usually cheaper than buying an individual policy, and the underwriting for the policy is usually easier because of the law of large numbers. Often, the company will share the premium expense with you. Lastly, you may be able to pay the premiums through payroll deduction and have part of the premium tax deductible.

Do not do this. This will make the premiums (or part of them), the short end of the stick, deductible. However, it will make the benefits, the long end of the stick, taxable. You do not want that result.

So, do your homework and review the plan available through your employer, for they may be able to offer you a better deal than you can find through an individual policy. If, not, here’s what to look for when buying a disability insurance policy.

Number one, top of the heap, most important is the company’s “definition” of disability. The best policies are based on your “Own Occupation,” known as “Own Occ” in the business.

They will have a definition that says something like this: You will be paid a benefit if you are unable to perform the material and substantial duties of your regular occupation, i.e., the occupation that you are engaged in when you became disabled. You will be paid a benefit even though you are working in another capacity.

As an example, you are a surgeon and, for some reason, you cannot perform surgeries, so instead you practice medicine as a primary care physician. The insurance company would have to pay you a benefit even though you are “gainfully employed.”

A less advantageous (to the policyholder) definition of disability is found in an “Income Replacement” policy. The definition of disability in such a policy is: Because of sickness or injury you are unable to perform the material and substantial duties of your occupation, and not engaged in any other occupation. So, in the above example, the insurance company could reduce or eliminate the benefit in our surgeon’s situation.

Another definition of disability found in a “Gainful Occupation Coverage” policy says: Because of sickness or injury you are unable to perform the material and substantial duties of your occupation, or any occupation for which you are deemed reasonably qualified by education, training or experience. Using this definition, an insurance company might say to the surgeon, “you have medical training, therefore work as a nurse or we won’t pay you.” They would probably face litigation, but I’m sure you get the point of differing definitions of disability.

Other things to look for in a disability insurance policy include the elimination period. Think of this as a deductible. The elimination period is the period during which you don’t get paid. A common example would be 30, 60, or 90 days. However, there are some contracts that wraparound existing coverage and might begin payments after two or five years.

Another important benefit is the benefit period. This is the period of time for which you get paid if you file a claim. Typically, this will be two years, five years or to age 65. Additionally, if you work up to age 65 and want to continue coverage, most companies will extend the benefit with the payment of additional premiums.

The next area to examine is partial or, as it’s known in the trade, residual benefits. Often, people are not totally disabled, instead they are partially disabled. Residual riders will say, “If you are disabled and are working 50 percent of the time, you will receive a 50 percent benefit.”

Because there are a myriad of other benefits available, you can make a disability insurance policy look like a Christmas tree. You can add a Cost of Living Adjustment Rider (COLA) that would increase annual benefits by a factor. Additionally, a Future Increase Option will automatically increase your coverage by a factor to keep up with your salary increases.

Well, that’s the skinny on disability income insurance. Make sure you have it – you just might need it.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. Randy Neumann, CFP® is a registered representative with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 600 East Crescent Avenue, Suite 104, Upper Saddle River, NJ 07458, 201-291-9000.