Article

The Simple Facts About Disability Coverage

For those individuals covered by a group plan, the disability coverage under which they are covered may not be enough. They should consider supplementing their coverage by purchasing an individual long-term disability policy of their own or topping up their coverage.

Group premiums can be as much as seventy-five percent less than those for individual coverage. However, group plans have limitations that must be understood. The contract may not be renewed, for example, the coverage may not be portable and the premiums may increase.

Most group long-term disability insurance plans will replace between sixty and seventy percent of income for only two years while the individual is unable to perform his normal job. However, after two years on claim, the definition of “total disability” under a group policy may be different than that for a personal plan. Consequently, the individual must be found to be totally unable to work if he or she is to continue to collect full benefits. The result is that he or she could be forced into a lesser-paying job, or onto welfare.

Individual policies, purchased on their own or to supplement group disability coverage, can give a person more options at a very difficult time. They allow the individual to lock-in a premium rate and purchase protection that will avoid any lapse of coverage should the individual find him- or herself between jobs.

Here is a brief introduction to some of the more important contract issues in income maintenance insurance:

1. Definition of disability – Purchase coverage that will allow you to resume your “own or regular occupation” rather than “any occupation.”

2. Guaranteed renewable or non-cancellable – With the former, the insurance company must renew the policy at the same rate as long as the insured continues to pay the premium; with the latter, the insurance company cannot cancel because of too many claims or a change in health or job description.

3. Residual or partial – Some contracts cover neither contingency and only pay for disabilities that are deemed to be total and the policyholder is unable to work at all. Many disabilities are not totally disabling and allow you to earn some fraction of your former income. Residual coverage pays a benefit equal to a percentage of lost income. If you previously earned $100,000 per year and while disabled could only earn $40,000, your loss was sixty percent. Your contract will entitle you to sixty percent of the benefit amount. Partial contracts generally pay a flat fifty percent of the benefit amount for a fixed period of time and then reduce the claim to only twenty-five percent for the remainder of the disability. Residual coverage is better for persons whose income depends entirely on their being on the job. Partial coverage will be of benefit to those whose business may continue during the period of disability, perhaps through the purchase of business overhead insurance.

4. Future insurability options – This is really not an option at all. Disability insurance is hard to qualify for at the best of times, so if you can buy it now, purchase the maximum you can afford today and lock in your right to purchase additional coverage in the future at standard rates based upon today’s contract language.

5. Cost of living – Purchase a policy that ties in to the Consumer Price Index to prevent inflation from seriously eroding your benefits in time of need.

6. Retirement protection and lifetime benefits – Almost all disability benefits are designed to stop paying out at age sixty-five. The question is, what happens then? Arrange for lifetime benefits to continue beyond age sixty-five.

7. Waiting period – This is the number of days you must be disabled before benefits begin. Your financial planning should include an emergency fund to provide you with four months’ income in the event of a variety of catastrophes, one of which is disability. This coincides with the best elimination period from a cost/benefit standpoint. With most disability policies, benefits are paid at the end of the qualifying month, so, if there is a 90 day waiting period your first cheque will not be issued to you until 120 days have elapsed.

8. Rehabilitation – This common sense feature should be mandatory, not optional.

Article ©1998 The Quarterly Dividend
Reprinted with permission