Insuring Against the Unknown by Deloitte & Touche LLP
What Is It and How Is It Useful?
Next | Previous | Table of Contents | Glossary | Home | Site Search |
|
Disability Insurance Insuring Against the Unknown by Deloitte & Touche LLP What Is It and How Is It Useful? |
|
.
|
What Is It and How Is It Useful? If you were to become disabled today, how would you earn your living? How would the loss of income affect your family? Would you change jobs? Would it make a difference whether you were physically or mentally disabled? Disability income protection is designed to replace lost income if you cannot work because of illness or injury. This type of protection should be a fundamental element of your financial plan because, if you are less than 60 years old, you have a greater statistical chance of becoming disabled than of dying prematurely. Did you know? A 42 year olds chance of disability is 3 times greater than chance of death? Disability insurance coverage is obtained from two primary sources: 1. The government, through :
2. Private insurance companies, through:
How much disability insurance you need depends upon your current income requirements. Disability policies often limit coverage to a percentage of earnings or to a maximum dollar amount. Would this limited amount be enough for you and your family to live on? Would you have alternative means of support? Disability benefits are sometimes subject to income tax. You need to determine if your benefits are subject to tax and, if so, how much would be left after taxes are paid. If the insurance was purchased on your behalf by your employer, the benefits will generally be taxable when you receive them. If you pay for the coverage, benefits are generally tax free. To start your analysis, estimate your "short-term and "long-term" income requirements. Short-Term - Short-term needs are often addressed in two ways. An employer sick pay plan pays employees for sick days which are usually earned annually. Additionally, an employer may have an accident or sickness plan that pays partial or full salary, after some waiting period, for a defined period of time (for example, up to two years). Long-Term Disability - a disability that exceeds a specified period of time. The actual number of days or months considered "long-term" will vary by insurer. Compare these needs with the benefits you are entitled to, if any, from federal programs (such as Social Security), state programs (such as worker's compensation), and any group coverage (such as that provided by your employer). If these benefits do not fully meet your needs, investments or other assets close the gap? If not, you may need to consider an individual disability policy. If you do decide to purchase an individual disability policy, you should look closely at the: Perils Covered. A policy may provide benefits resulting either from accidental bodily injury alone (accident only coverage) or from accidental bodily injury or sickness (accident and sickness coverage). What does this mean to you? The broader coverage is usually well worth any increased cost in premium. Maximum Benefit Period. You may choose a benefit period ranging from as short as six months to as long as your lifetime (sickness coverage is often limited to age 65). You should select a benefit period based upon your needs. What does this mean to you? If you need permanent protection, you should consider buying coverage with longer benefit periods (for example, to age 65) for both accidents and sickness. Definition of Disability. Understanding the definition of disability in a particular policy is critical. The definition could refer to an inability to perform the duties of any occupation, or of your occupation, or of your specific job. In addition, the definition may require either partial or total disability. What does this mean to you? Look at the definition of disability. Does disability mean inability to do your regular job for a certain period of time? Or inability to perform any job or one that you are "reasonably" suited by education, training or experience? Or is it a combination of both definitions? The best policies define disability as the inability to do your regular job for a certain period of time. Under these policies, you know you're covered when a disability puts you out of your job. This type of policy costs more; but the increased peace of mind you gain is generally well worth the increased premium. Waiting Period. The waiting period is the number of days after a covered disability occurs before benefits begin. The period can range from no days for accidents and seven days for sickness to as much as one or two years for accidents and sickness. When selecting a disability policy, you should coordinate the waiting period with any other coverage you have. What does this mean to you? A small increase in the waiting period can produce a considerable savings in premium. If you have other resources available to cover short-term needs, you can allocate more premium dollars to build a more adequate long-term protection program. A disability policy is either short term (up to two years) or long-term (up to age 65 or for life). Many policies are classified by whether they can be renewed. These are some more key concepts of information:
Did you know? The cost of disability insurance is higher for women because historically women have lived longer and have filed more disability claims. Tips: It is generally advisable to purchase a policy that cannot be canceled. This feature gives you the assurance that the risk of disability will be covered throughout the term of the policy. You also want to level premiums throughout the life of the policy. That way, you can budget and plan for the cost of covering this risk. Premium and Policy Considerations Premium rates depend on your age, health and occupation, all of which are significant factors in determining your disability risk. Older people are at a higher risk of disability, as are people involved in hazardous work. Your premium will also depend on the amount of income you are trying to replace. The higher the dollar amount of your coverage, the higher your premium. Did you know? If you earn $40,000 after taxes and can work for 20 more years, your job is an $800,000 income stream! Here are some sample premiums for individual
disability income insurance policies:
There are many other provisions you should consider in purchasing or analyzing disability insurance, including: Coordination of Benefits (COB). Means that the amount of the payments you might be entitled to receive from the insurance company will depend, in part, on one or more other benefits you may receive as a result of your disability. Typically, a certain target benefit is established and the policy makes up some or all of the shortfall. Return of Premium. Is a provision that requires that part of your premium be refunded if no claims are made for a stated time as defined in the policy. Additional Purchase Options. Gives the younger insured who cannot afford premiums for larger policies the option of purchasing additional insurance at a later time. Cost of Living Adjustment. Provides an increase in coverage equal to the increase in the cost of living as measured by the consumer price index. This may increase your premium by 20%-25%, but the increase in benefits makes this provision worth considering. Residual Benefit Riders. Pay some benefits if you return to work part-time while still disabled. These riders are also called partial, proportional, gradual recovery or presumptive disability. In single parent households or if one spouse works in the home, planning for disability can be particularly important and difficult. The spouse working in the home may not have any income stream on which to base a disability benefit; therefore, insurance may not be available. In addition, additional expenses related to child care may need to be considered in computing the needed amount of disability benefit. Enjoy the following special features and information sources that Deloitte & Touche OnLine has put together to guide you through your insurance planning! Books A Special Examination Is Needed for Your Disability Claim, published by the U.S. Department of Health and Human Services (January 1992). Disability, published by the U.S. Department of Health and Human Services (March 1994). How to Buy the Right Insurance at the Right Price, by Bailard, Biehl & Kaiser (Dow Jones-Irwin, Homewood, IL 1989) How We Decide if You Are Still Disabled, published by the U.S. Department of Health and Human Services (January 1991). Personal Financial Planning, by G. Victor Hallman & Jerry S. Rosenbloom (McGraw-Hill, Inc., New York, NY 1993). The Guide to Buying Insurance: How to Secure the Coverage You Need at an Affordable Price, by David Scott (The Globe Pequot Press, Old Saybrook, CT 1994). Periodicals Do You Need Disability Insurance?, Consumer Reports (May 1995). If You're Self-Employed, Have You Thought About Disability Coverage?, Profit Building Strategies (January 1993). Buy an Affordable Disability Policy, Money (February 1995). What's Social Security Got for You?, Kiplinger's Personal Finance (November 1994) Affordable Insurance That Works When You Can't, Business Week (August 29, 1994). Why Women Will Pay More for Disability Insurance, Working Woman (August 1994). How to Insure Your Paycheck With a Sound Disability Policy, Money (June 1994) Jumps to the Internet Insurance Information Institute: This organization seeks to improve the public's understanding of property/casualty insurance by providing information and analysis to the media, individuals and organizations. The III publishes a number of helpful consumer guides (available at no cost) such as 12 Ways to Lower Your Homeowners Insurance Costs. Insurance News Network: This organization provides unbiased consumer information about auto, home and life insurance, including premium costs by state and insurance company ratings from Standard & Poor's. National Association of Insurance Commissioners: This is an organization of insurance regulators from the 50 states whose primary purpose is to protect the interests of insurance consumers. The NAIC publishes a number of consumer guides including 1995 Guide to Health Insurance for People with Medicare, Consumer's Guide to Home Insurance and Consumer's Guide to Auto Insurance. SafeTnet: A comprehensive set of links to insurance-related Internet sites. Workman's Comp. & Social Security Disability Benefits Help Group Http://www.mindspring.com/support4u/benefits.html Click here to see State Insurance Departments Insurance Organizations Insurance Information Institute National Insurance Consumer Helpline National Consumers League National Insurance Consumer Organization |
|||||||||||||||||||||||
| Next | Previous | Table of Contents | Glossary | | ||||||||||||||||||||||||
| Home | Personal Finance Advisor | Tax
News & Views | Growth
Company Services | Archives | Copyright © 1996, 1997, 1998, 1999, 2000 Deloitte &
Touche LLP. All rights reserved. |
