Disability Income Insurance: Protects your most valuable asset! Your ability to earn an income.
Each year 12% of the adult population suffer a long term disability. Indeed, medical advances can be felt far beyond the highway. A generation or two ago, a worker who suffered a heart attack on the factory floor would have died.
Today, paramedics and emergency medical technicians arrive in minutes, ready to stabilize and transport the patient to the hospital -- by helicopter, if necessary.
Throughout much of the country, EMTs are able to install pacemakers right at the scene.
And there’s more.
Has your liver gone bad? No problem. We’ll give you a new one.
Clogged arteries? We’ll predict the stroke before it occurs, give you a quadruple bypass, and you’ll be back on the tennis court in six weeks.
Failed kidneys? We’ll hook you up to a machine that will take over the job.
Modern medicine can do many things. Above all else, it can keep you alive. But that doesn’t mean you’ll never miss a day of work.
1 out of every 7 workers will suffer a five-year or longer disability before reaching age 65.
At age 32 your chances of suffering a three-month or longer disability is 6 times more likely than death.
At age 35 your chances of suffering a three-month or longer disability is 50%.
At age 45 your chances of suffering a three-month or longer disability is 44%.
On average 7 out of 10 claims for Social Security disability benefits are refused the first time requested.
The Air Bag Phenomenon
Interestingly, the reason you are so likely to suffer a disability is exactly because you are so unlikely to die. Since 1960, the frequency of death from the four leading causes have sharply decreased, while the frequency of disability has sharply increased. I call this the Air Bag Phenomenon.
If you live in a major metropolitan area, you’d agree that there are 10 rush hours every week, one each weekday morning and evening.
How often do you hear of a traffic accident in those rush hours?
Every time, of course.
But in how many do you hear that a driver was killed in a rush hour accident? That’s much less common. Since fatalities are unusual, most of us don’t give those accidents a second thought, other than to complain that someone made us late. But the truth is that someone is getting hurt in those accidents. After all, you’re not likely to avoid injury after sustaining a collision at 55 mph.
And that’s my point: Due to the advent of airbags, many people now survive auto accidents, who 10 years ago would have been killed. But this does not mean accident victims just walk away from the scene. Rather, it simply means they go to the emergency room instead of the morgue.
Indeed, a study by the University of Pittsburgh showed that people protected by an air bag who are involved in a high-speed, head-on collision often suffer a variety of injuries caused not by the collision, but by the airbag itself -- including burns to the chest and face, loss of hearing and vision, and broken forearms.
Airbags also fail to prevent legs from being broken. And research from the University of Florida revealed that many drivers whose lives were saved by airbags suffer injuries that are not readily apparent to rescue workers, such as lacerations to the liver. Thus, airbags do not assure that you will survive injury-free if you are in an accident.
So while airbags have been very good news for the life insurance industry (as the number of highway fatalities has dropped), it has been bad news for the health and auto insurance industries (which pay the medical expenses of accident survivors).
Statistics were obtained from Commissioner's Disability Tables and the Senate Finance Committee.
Disability insurance pays cash benefits to the policyholder in the event the insured is unable to work due to sickness or injury. That cash benefit ranges from 50% to 70% of income. The insurance company will not pay more than 70% of income because there must be an incentive to return to work.
A disability policy is composed of various elements:
Elimination Period - It is the period of time the insured must wait after becoming disabled to receive benefits. Typical waiting periods are 30, 60, 90,120,180, and 360 days. The longer the elimination period the less expensive the policy.
Benefit Period - It is the period of time the benefits will be paid following the elimination period. The benefit period could be from 2 years to age 65 to lifetime. The longer the benefit period the more expensive the policy.
The Amount of Benefit - The larger the pay-out the more expensive the policy. The benefit will not normally exceed 70% of income.
Residual Benefit - Percentage of benefit paid if you return to work and are still partially disabled and cannot return to work full time or cannot earn your full income.
Own-Occupation - Pays a benefit if you are unable to return to your present occupation but can work doing something else. For example, a doctor who is a surgeon, cannot return to surgery but can teach. This is the most expensive type of disability policy.
Reasonable or Any Occupation - Pays a benefit while disabled, but stops when you are able to return to work at a job that matches your education and experience. This policy is less expensive than an Own-Occupation policy.
Occupation - Occupation is a factor used in determining rates. For example, a doctor's rate would be much lower than a blue-collar worker.
Guaranteed Renewable - Guaranteed Renewable policies cannot be cancelled by the insurance company even if a change in the insured's circumstances would make him or her a greater risk. Plus, the insurance company cannot make any changes to the provisions of the policy, or add restrictions. When purchasing an individual disability policy it should be Guaranteed Renewable.
Non-Cancelable - Guarantees future premiums will not be increased. When purchasing an individual policy it should be Non-Cancelable.
Presumptive Disability - Presumptive disability means that you are considered total disabled and eligible for benefits for the loss of sight in both eyes or the loss of two limbs. The better contracts also presume total disability for the loss of hearing in both ears, loss of the power of speech, or the loss of the use of two limbs.
Other Benefits that can be added to an individual disability policy, but could also increase the cost:
Protection Against Inflation - A benefit that can be added that offers a cost-of-living adjustment for inflation during a long-term claim.
Automatic Increase Rider - Automatically increases monthly benefits for a specified period of time. A typical increase is 5% compound.
Future Increase Options - Allows the insured to purchase additional benefit amounts without proof of insurability.
Capital Sum Benefit - Pays the insured a lump sum benefit up to 12 times the monthly benefit if the insured loses the sight of one eye with no possibility of recovery or has a hand or foot severed. This benefit is paid in addition to the other benefits.
Rehabilitation Benefit - To help a disabled insured return to work, this benefit will pay some of the expenses incurred when the insured enrolls in an approved rehabilitation center. This benefit is paid in addition to the other benefits.
Transplant & Cosmetic Surgery Benefit - Under this benefit, any disability arising from donating a transplant organ, improving your appearance or correcting a disfigurement will be covered by the policy.
Types of Coverage
Social Security
Social Security does not just provide for retirement income but disability income as well. However, more than 70% of the applicants who apply, fail to get coverage the first time they apply. You can get an estimate of what your benefit might be by going to the Social Security web site.
In 1992, the average monthly payment for a disabled worker was $642; the average monthly payment for a family of a disabled worker was $1093.
Eligibility is based on being unable to perform any gainful employment.
You are eligible for benefits after you have been disabled for 5 months and if the disability is expected to last 12 months.
85% of Social Security disability payments are subject to federal income tax if your income exceeds $34,000 individually or $44,000 jointly.
Workers Compensation
Most employers are required to provide this coverage. The amount and duration varies by state. Workers Compensation only pays if the disability occurs on the job, and usually lasts for only a few years and the payments are low.
Individual Policies
For individual policies, the applicant needs to qualify and go through an underwriting process, similar to the process required for life insurance. The applicant could be subject to a higher premium or even be declined based on his or her occupation, medical history, or lifestyle. Individual policies are usually purchased by high income professionals because of the cost.
Group Policies
Some states require employers to carry group disability insurance anywhere from 26 to 52 weeks.
Group Long Term Disability (LTD)
Group LTD is carried by almost half of mid-size to large employers and provides long term benefits for at least 5 years covering about 60% of salary. The premium is usually very low, does not require proof of insurability, and often is fully paid by the employer.
