How to Buy Disability Insurance


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Nearly one-third of U.S. workers will become disabled at some point in their career before reaching retirement, according to a 2009 estimate from the Social Security Administration. Yet the federal agency says that 70% of employees aren’t covered by private long-term disability insurance. Social Security disability benefits are available for certain disabled workers, but the average payout is only 40% of a person’s income and the allowance rate for initial claims can be as low as 30% in some areas of the U.S.

Making up for the rest of that income is possible, but there’s a price. A 35-year-old healthy male who earns $100,000 in salary can purchase an individual disability policy with an annual benefit of $60,000 until age 65 for about $1,350 a year, according to the Guardian Disability Insurance Brokerage.

Here’s how to check your options for additional paycheck protection:

Short- vs. long-term makes a difference.

Short-term disability, also known as sick leave, starts as soon as you’re unable to work due to illness, injury or the birth of a child. Forty-seven percent of U.S. employers offer short-term coverage and 40% provide long-term disability, according to industry trade group LIMRA. Some states, such as New York and California, require a minimum level of short-term benefits.

Know what you already have.

It’s important to determine your short-term coverage before going to purchase a long-term policy. All policies include an “elimination period,” which is the amount of time from when you become disabled to when benefits kick in. Think about this as you would view any insurance deductible. You don’t want to pay higher premiums for a shorter waiting period of 30 days if you have six months of short-term coverage.

Know how much you need.

Long-term policies typically last for a set number of years or until you reach retirement age. The shorter the benefit period, the lower the premium. You should also check whether you can keep coverage if you leave your employer. This is known as portability.

Determine how much coverage you need.

A typical long-term group plan will replace up to 60% of your salary. If your employer pays all or even a portion of the premiums, that’s likely your best option to start with. You can calculate how much you might need here or here.

Drawbacks to group plans.

Group plans usually only cover salary; no commissions or bonuses unless that is considered part of your core compensation. Some group plans are capped at $5,000 a month, or $60,000 annually. And if you pay premiums on a pre-tax basis from your paycheck, you will be taxed later on the benefit payout.
Age matters. Younger workers might want to check rates with an insurance agent before buying through their employer’s group plan. In the individual market, age and health status dictate the premiums.

Read the fine print.

Understand the difference between “own” or “any” occupation. Consumer advocates recommend a policy that’s triggered when you can’t do your specific job, not just any work. This is known as “own-occ.” An “any-occ” definition is less desirable and is based on being unable to do “any” work given your training, education and experience.

Protect yourself.

Make sure the policy cannot be cancelled, known as “non-can,” and that renewal is guaranteed at the same premium as long as you pay on time.

Accidents AND illness.

Some policies limit payouts to accidents and not illness. Consumers mistakenly think serious accidents are the overwhelming reason for a long-term disability when common chronic diseases play a bigger role. Only 9% of long-term disabilities were caused by injuries in 2009, according to the Council for Disability Awareness. Calculate your odds of missing work for months or years at this site and check out the leading causes of disability.

What not to do when looking to buy disability insurance.

Don’t forget to ask about riders.

Riders for cost-of-living adjustments or a future purchase option can allow you to increase coverage as they earn more money without taking another physical or referencing your medical records.
Don’t buy a policy before checking the insurer’s financial strength. Major credit-rating agencies such as Standard & Poor’s and A.M. Best offer company reports.

Don’t just accept the insurance company’s decision on coverage limits.

Those with more variable income may be surprised at premiums and level of coverage, however particular occupations and risks are covered uniformly. More than three years of business records should clear up any questions about income levels and variability.

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