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Man's
ability to earn pay during the working years is by far the greatest single
contributor to his financial success...
Likewise, a significant disability is the greatest assurance of poverty.
You would think it would be simple to define the word disability, but the actual definition depends on who is defining it. For example, before getting into the insurance business, I would've defined disability as being unable to function properly due to a physical or mental sickness or injury. But when it comes to disability with regards to performing your job, the definition becomes more technical. And when your disability involves an insurance company sending you an income check while you are disabled, it is that insurance company who defines exactly what disabled means. Hence, one of the most important elements of any disability income policy is the definition of the work disability.
Obviously, we are
speaking about disability as it pertains to one's inability
to perform the duties of a job or career. But there are distinctions
as to just how disabled you are, and whether or not your disability should
be keeping you from working. Below, I will share with you two different definitions
of disability from two particular policies from two different insurance companies.
Definitions of Total Disability or Totally Disabled
Company #1:
Totally disabled if:
a). covered persons are unable
to perform on a full-time or part-time basis each of the Important
Duties of their Own Occupation because of an Injury or Sickness that started
while insured under this Policy;and
b). do not work at all in any occupation; and
c). are under a Physician's care.
Company #2:
Totally disabled if:
a). Insured is considered totally disabled if there is a complete inability to perform the material duties of their own occupation for 24 months. Own occupation is defined as the job performed on the day before total disability began; also
b). after 24 months, insured persons are considered totally disabled only if they are completely unable to perform the materials duties of any occupation for which they are reasonably fit by training, education or experience.
You can see the difference in definitions above. Some policies actually define disability as the inability to perform all the duties of any occupation! That is basically the definition used by the Social Security Disability Insurance policy offered by the Federal Government. So you can see that the definition of disability that applies to you, is actually the definition as written by the entity you choose to support you in the event that you are unable to earn your regular paycheck.
Let's assume you are a surgeon who loses flexibility in your hands due to a neurological condition. Even though you have the ability to earn a living by teaching at a university's medical school, you stand to lose hundreds of thousands of dollars each year in salary. It would therefore be very important that you find a policy that includes in the definition of disability, that you will be considered totally disabled if you cannot perform the major duties of your occupation, even if you are working in another occupation, or choose not to work in another occupation, though able to do so.
Suffice to say here, not every disability is the same, and not every definition of disability is equal. For more on "What is Disability Insurance?", click the text.
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As with most other insurance products, Disability Insurance is a method of transferring financial risk from yourself, to the insurance company. The financial risk here is that of a disability causing you too loose your ability to perform the duties of your occupation. So the brief explanation of Disability Insurance is that it pays you a portion of what you would have earned from your job, should you become unable to work due to a mental or physical disability caused by illness or injury. Or, in other words, it replaces your income lost due to disability.
Disability Income policies are one of the more complicated forms of risk management you will see today. Long-term Care policies, a close cousin of DI policies, is also one of the more complex of contracts. There are a lot of different terms and definitions that could effect whether or not you receive benefits under both types of contracts. Though it is possible to purchase Term Life Insurance or Fixed Annuities as a commodity, the proper purchase of Disability Income protection requires a thorough understanding, by both you and your planner or agent, of your particular needs and the capabilities of a particular contract. And although the final decision in which policy to purchase may come down to price, that decision should only be addressed after your initial risk management concerns have been properly addressed by the contract.
Types of Disability Income Policies
The first major categories you could place DI policies into would be Individual and Group. As the name implies, group policies are issued to companies for the benefit of their employees. Should the employee terminate employment with that company, or should the company decide to terminate the group DI contract, the employee would not be covered under any contract with regards to disability income. An individual policy, to the contrary, is attached to the individual and the coverage is not dependent on employment of a particular company. The individual policy travels with the employee from job to job, or position to position. As job duties, titles, or income changes, the individual policy should be adjusted to reflect those changes. Individual policies usually offer better definitions, a greater percentage of earnings, and/or longer benefit periods, causing them to cost more than group plans. Cost will vary, but the average premium for an income replacement policy could run around 2%-3% of your salary.
The presence of association policies is rapidly increasing. Association Disability Income policies are usually individual policies offered to employee groups. An agent markets individual policies to each employee with the endorsement of the employer (company). The employee pays the entire premium, but the employer lends accounting services to offer payroll deductions from each employee's paycheck. Because the employee pays the entire premium, any disability benefit checks received by that employee will be income-tax free.
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Here are some of the variables to consider when shopping for a DI policy:
Definition of "Total Disability." This is, perhaps, the most critical element in your policy. Protect the educational investment you’ve made in your career by looking for "own occupation" coverage. "Own Occ" policies pay benefits if you are unable to engage in your own occupation even if you can return to work at lower paying job but prefer not to work in a job that’s not in your field. Under many other policies, however you must be unable to perform any job for which you are qualified.
Length of Benefits. Ideally you should look for coverage that protects you until age 65—even if you have to opt for lower benefits to keep the premium more affordable.
Amount of coverage. To ensure that there is an incentive to return to work, most plans set limits on the percentage of income you can insure—usually 50% to 60% of your total gross annual earnings. If you have an employer- provided plan that provides only limited coverage, consider purchasing supplemental coverage from another source.
Elimination Period. The waiting or "elimination" period is the amount of time you must wait before your disability benefits can start. Keep in mind, the shorter the waiting period, the higher the premiums.
Taxation of Benefits. Benefits may be tax-free if you pay the premiums out-of-pocket, so check with your tax advisor.
Partial or "Residual" Disability Coverage. After a serious disability, many people return to work on a part-time basis—which may also mean part-time pay. Partial or "residual" benefits allow you to receive a combination of both income and benefits until you fully recover. Without this feature, your benefits would most likely stop as soon as you return to work.
Cost of Living Adjustment (COLA). Adding a COLA to a disability policy could cost you 25% to 30% more in premiums, so many people go without it. But what if you become disabled for a long period of time—say fifteen, twenty years—or for life? If the cost of living continues to rise, this feature may be well worth the money.
Financial Stability of the Insurance Company. Find out as much as you can about the insurer. A rating of A+ or better by A.M. Best Company, AA- or better by Standard & Poor's, A1 or better from Moody's, AA or better from Fitch, and B- or better from Weiss are good indicators of financial strength.
Portable Coverage. There are advantages to policies that allow you to move about from job to job, without fear of losing your coverage. Association-sponsored insurance is an excellent source of insurance because it is not tied to your place of employment.
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