Do I Really Need Disability Income Insurance?
While most people understand the necessity and value of life insurance, it’s unfortunate that disability income insurance is not always thought of with the same amount of importance. Social Security cannot be relied on to replace your lost wages in case of a serious illness or accident. You must be severely disabled to qualify for Social Security disability benefits and, even then, you will have to wait at least six months for payments to begin. Also, Social Security payments may not sustain you and your family at your current standard of living.
You may be able to “get by” for a few months on your savings but, if the disability is prolonged, you may run through some or all of your savings. Further financial hardships would become inevitable. You may miss mortgage, car, and other credit payments, causing damage to your credit rating. Utility bills, tuition, grocery bills, and business/professional expenses will also continue despite disability and loss of income.
The bottom line is that if you lose your ability to earn an income, it may be harder to make ends meet. Disability income insurance can be a sensible solution to help protect your income in the event you become totally disabled.
Types of Coverage Available
Depending on your income, the maximum coverage you can buy will replace 45% to 75% of your pre-disability earnings. The higher your income, the lower the benefit that will be available for purchase. The cost of the coverage will depend on such factors as the risk level of your occupation, your age, your health history, and the scope of coverage. Professionally employed individuals are typically in the lower risk category than those engaged in more physically demanding work. Individual disability income insurance is by application and is subject to underwriting approval.
It should also be noted that when you pay the premiums (vs. an employer-provided policy), the income from personal disability income policies is tax free. If your employer has a salary continuance plan, you should know the dollar amounts of coverage, the waiting period, and the length of payments so you can coordinate your personal coverage with your employer-provided benefits.
When examining the contract provisions outlined in a potential disability income insurance policy, consider these items:
- Definition of total disability – Definitions can include coverage in the event that you cannot perform any duties of your own occupation, or any duties of any occupation. The “own occupation” definition offers better protection, particularly if you are a highly skilled professional.
- A noncancelable clause – Before age 65, the insurance company cannot cancel or change your policy or increase premiums.
- Residual disability payments – If you return to work at a less demanding job for a fraction of your former salary, the policy will pay benefits in proportion to your loss of earnings.
- Future insurability – This benefit allows the purchase of future coverage without regard to medical insurability.
- Benefits payable until age 65 or for life.
- A reasonable waiting period – Waiting periods in disability income insurance policies vary. Typical waiting periods are 90 or 180 days. Shorter waiting periods are more expensive than longer waiting periods. Consider your liquidity, sick pay, and any money owed to you so you can decide how long a waiting period you could reasonably afford.
It is important to note that there may be an additional premium charged for adding any of the above riders to a disability income insurance policy.
Disability income insurance can protect your most important asset – you and your ability to earn an income. Consult with your insurance professional to determine the type of disability protection that would best help protect you and your family.