on any of the topics in the Table of Contents listed below to go directly
to that discussion.
Even if your employer provides you with disability coverage, it’s vital to examine the terms and conditions of that coverage, since it may not provide you with adequate coverage to meet your needs.
If you couldn’t work, how long could you continue to pay your bills? Chances are, whatever employer-provided and government-provided coverage you have is inadequate, and you need to provide yourself with private disability coverage. Here are guidelines designed to ensure that you are adequately covered.
Many of us have life insurance, however very few of us have long-term disability coverage. Yet according to statistics, workers are more likely to sustain a long-term disability (one lasting longer than 90 days) than die at an early age. Long-term disability insurance is fairly expensive, and people tend to think that they will be protected by workers’ compensation or other sources. However, Social Security, workers’ compensation, and employer-offered long-term coverage are often inadequate.
Here’s a typical disability scenario—one that could happen to anyone.
Here are some suggestions for investigating the disability coverage you may already have, in order to find out whether it is adequate to meet your needs.
If your employer provides long-term disability coverage—which must usually be paid for by the employee—it’s a good idea to buy it. The premiums are probably discounted from what you’d pay for a private policy.
However, take a good look at what the employer-offered policy covers, and buy a private policy if you decide you need it. Many employer-provided group policies are inadequate in that they limit either the term of the coverage or the amount of benefits paid. For instance, benefits may last only a few years, or benefit payments may represent only a small part of executive salaries.
Check up on the following:
Who pays the premiums?
Worker’s compensation covers injuries that happen on the job. Benefits vary widely from state to state, since benefit amounts depend on state provisions. The average weekly maximum is about $450, while the average weekly minimum (where there is a minimum) is $90. Most states pay benefits for the employee’s lifetime in cases of permanent total disability.
In addition to the requirement that an injury be work-related, the payments you would receive under worker’s comp may be inadequate.
Veterans whose disability is related to a service-related injury may be eligible to receive disability benefits in certain states. If you are a veteran, find out whether a disability fund exists in your state.
Social Security provides long-term disability coverage. However, more than half of the individuals who apply for Social Security disability are denied coverage, and the system leaves many gaps. Further, the payment amounts—from $500 to $2,000 per month--may be inadequate for many individuals.
If you decide you need supplemental coverage, here are some things to look for in a private policy, as well as some suggestions for getting the most for your money.
A disability insurance company will usually not cover you for more than 60% of your income. Look for a policy that provides coverage for this level.
When you shop for a disability policy, be ready to prove your income level.
The definition of disability in a policy is extremely important. It tells you under what circumstances you will qualify to receive benefits.
Own-occupation coverage pays benefits if you can’t work at your chosen field—e.g., attorney or teacher. Own-occupation policies are the most expensive type of disability coverage because they provide the broadest coverage. (If you cannot perform the duties of your own occupation, you can take a job in a related field, make a decent income, and still collect the benefits.)
Any-occupation coverage pays benefits if you can’t work at any occupation for which your education level and training has prepared you. Thus, if you can no longer perform the duties of a nuclear physicist, but you can teach physics at college level, you will not receive benefits.
Income-replacement policies, which are less expensive than own-occupation or any-occupation, replace whatever portion of your income you are no longer able to earn.
The longer the waiting period before benefits kick in, the less your premium will be. If you have adequate sick leave, short-term disability, and an emergency fund, and can support a longer waiting period, choose a policy with a longer waiting period.
Waiting periods can last as long as 730 days.
It’s a good idea to get a benefit period that lasts until age 65, at which point Social Security payments will begin. Be aware that many policies cover you for only two to five years, an inadequate period.
Unless you are so young that you haven’t yet had time to qualify for Social Security, a policy that provides lifetime benefits, at costly premiums, is generally not worth it.
If you are able to work only part-time instead of your previous full-time hours, will you receive benefits? Unless your policy states that you are entitled to residual benefits, you won’t receive anything unless you are totally unable to work.
The difference between these two terms is very important. If a policy is "non-cancelable," you will pay a fixed premium throughout the contract term. Your premium will not go up for the term of the contract. If it is "guaranteed renewable," your premiums could go up.
These are all additions to policies, at a further expense to you.
An option to increase coverage gives you the ability to buy more coverage without being turned down for health reasons.
You will pay about 10% of your premium to have this option.
The cost-of-living rider, which can add 20 to 40% to your premium, pays you increased benefits after you become disabled.
If you qualify for Social Security disability, the insurer gets to decrease your coverage.
This important rider allows you to stop paying premiums once you become disabled.
This is an option that allows you some cash back if you do not collect on your disability coverage after a certain amount of time.
Before buying a policy, check the financial soundness of your insurer.
If your insurer goes bankrupt, you may have to shop for a policy later in
life, when premiums are more expensive.
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