Disability Insurance: The Devil’s in the Details

We had help with this article on Disability Insurance. It is written by an Insurance Professional who is partnering with PlumTree Financial Planning to bring you 3600 of financial education and guidance.

Disability insurance pays some or all of your salary if you become disabled and are unable to work at your job. Disability insurance is separate and distinct from health insurance. It is not intended to pay medical bills, but, instead the bills of daily living since you are not able to get back to work.

Many people believe that all insurance policies are equal – they’re not. There are details and subtleties within the contracts that most consumers – and some advisors – may fail to recognize or appreciate. When it comes to disability insurance, knowing and understanding these details may be the difference between receiving your claim and financial hardship.

Detail #1: Do I Need Disability Insurance?

Before going through the essentials of an individual disability insurance policy, let’s first review some facts:

  1. According to the Social Security Administration, one in four adults will become disabled for 90 days or longer during their working years.
  2. While most people think of disability as being caused by accidents, the overwhelming majority (almost 90%) is caused by illness.
  3. Depending on your profession and your income, long-term disability benefits through your employer may not be enough. These policies are generally capped at a certain amount of income and many will only cover you in your occupation for two years.
  4. Nobody ever thinks that they will be the one that will be disabled. Do you have enough money in the bank to pay yourself when your employer won’t?

These are just a few of the reasons why it is essential for professionals to obtain their own disability insurance policies. When assessing which policy is right for you, remember this – a disability insurance policy is a legal contract and the company will only pay if you meet the terms of the contract and they are legally obligated to do so. As with any contract, be absolutely certain that you understand the terms before signing.

Do you need disability insurance?

Detail #2: What Exactly Does Disabled Mean?

The most important aspect of any disability insurance policy is what defines a disability. A true own-occupation definition will consider you totally disabled if “due to injury or sickness, you are not able to perform the substantial and material duties of your occupation.” While some professionals might get by with a lesser definition, true own-occupation offers the greatest level of security. There are certain professions, such as surgeons and dental professionals, that should only consider this definition. Beware – “substantial and material” means different things to different insurance companies – you may want to consult with a professional.

But what if you are not totally disabled? Will the policy still cover you if you lose only part of your income? While each company refers to it differently, the Partial Disability Benefit Rider is a must. In the event an accident or illness causes you to lose income, this rider will pay you a proportional benefit and ensures that your overall income is protected. For example, a dentist, who owns a disability policy with a $10,000 monthly benefit, suffers an injury in a car accident and cannot practice as he did prior to the accident.  As a result, he suffers a 60% loss of income and will receive $6,000 in monthly income until he can recover and bring his income up to pre-disability levels.

Surgeons and dentists must consider disability insurance.

Detail #3: 5 Additional Items You Might Want on Your Policy

Once you’re assured of the best definitions of total and partial disability, you should determine which riders (optional benefits available for an additional premium) are necessary. These help you to customize your policy to your individual needs.  The most common riders are:

  1. Future Increase Option – allows you to increase your disability insurance without medical underwriting as your income increases.
  2. Cost of Living Adjustment – while receiving disability benefits, this rider will increase your benefit each year by a certain percentage in order to keep pace with inflation.
  3. Student Loan Protection Rider – will provide you an additional benefit to cover your student loan payments.
  4. Retirement Protection Rider – while disability insurance is designed to protect your income, it does not help you with retirement savings. This rider will put additional money away for your retirement.
  5. Catastrophic Disability Rider – if your disability is so extreme that you require assistance in your daily life, this rider will pay an additional benefit to help cover those higher costs.

Want to learn more about disability insurance and how it can help you to protect what you’ve worked so hard to build? The critical next step is to find an independent advisor who knows the disability insurance marketplace and can assist you in identifying the most appropriate policy from a quality insurance company that best addresses your needs.

If it’s time to get your portfolio on-track for financial success, schedule a call with Beth D’Andrea, CFP to start the discussion.

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