Disability Insurance

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	Disability Insurance Personal Finance Advisor by Deloitte & Touche OnLine June 14, 1999

Protecting yourself from incapacity is vital to your overall financial plan.

Managing personal risk with disability insurance

Disability insurance provides financial protection for the insured person during periods of incapacity from working. Several private and government programs include disability coverage -- for example, Social Security, state disability programs, workers’ compensation, disability coverage included in life insurance policies, and group plans offered by employers or trade associations. Group disability policies generally provide benefits based on a percentage of salary, with dollar limitations. Disability coverage also can be purchased individually, and it may be advisable (depending on the applicable terms) to supplement group or other disability coverage with an individual policy.

Definition of Disability: There are two fundamental definitions of "disability" used in disability insurance policies:

Any Occupation (any occ): The insured is deemed disabled if he/she is unable to work in any occupation (skilled or unskilled), regardless of his/her qualifications or salary requirements.
Own Occupation (own occ): The insured is deemed disabled if he/she is unable to perform the principal duties of his/her occupation. Under this definition, the insured receives benefits if he/she is unable to engage in his/her current occupation (for example, surgeon), as opposed to any occupation (for example, unskilled worker) or another suitable occupation (for example, college instructor).

Variations or hybrids of the above definitions also are used. For example, under the "modified any occ" definition, the insured is deemed disabled if he/she is unable to engage in a suitable occupation, based on the individual’s education, training, experience, prior economic status, and/or other factors. A common type of group disability coverage purchased by employers is "hybrid own occ," which combines own occ and modified own occ. With such policies, the own occ coverage typically applies for a limited number of years after the insured individual becomes disabled (for example, 1-5 years), after which the modified own occ definition applies for the duration of the policy benefit period.

Other Terms: Following are some other important terms and provisions that should be considered when reviewing or purchasing disability coverage:

Elimination Period: The period of time after the disability occurs and before the disability benefit payments begin (also referred to as the waiting period). The elimination period can be up to one year. As a general rule, long-term disability plans call for disability payments to begin within 30 days after the end of the elimination period.
Maximum Payments: Benefit payments may be a fixed dollar amount or a computed amount based on the insured’s salary. Benefits under loss of income policies are based on the percentage of income loss due to the insured’s disability. Some policies include a coordination-of-benefits clause that can result in reduced benefit payments if the insured receives other disability income (for example, Social Security). Other important provisions affecting total payments include (1) cost-of-living adjustments and (2) waiver of premiums while benefits are being paid.
Maximum Benefit Period: This clause determines how long benefit payments will be made. Benefit periods may be broken down into two categories -- short-term (for example, two years or less) and long-term (for example, until retirement age) -- with differing benefit payments for each category. Most long-term benefits are paid until age 65; consequently, a rider usually will be needed to extend payments for lifetime.
Renewal Provisions: The cost and availability of disability insurance for various job categories can change over time; therefore, it is important to understand the renewal provisions included in a policy. Guaranteed renewable policies allow the insured to renew the coverage until the end date stated in the policy, regardless of any change in health or occupation. A noncancelable policy allows the insured to renew the coverage until the end date, and with this clause, the insurance company usually cannot increase the premium.

Income Taxes: If the insured pays the disability insurance premiums, any disability income received under the policy will be non-taxable. However, if an employer pays the premium, the disability benefit payments will be taxable income for the insured individual.

Social Security: For 1999, the average Social Security monthly benefit for a disabled worker is $733. This amount may be reduced if total disability benefits exceed 80 percent of the disabled person’s average current earnings. To qualify, the individual must

demonstrate that the disability prevents substantial gainful employment,
Be under age 65,
Have a disability that is expected to last for at least 12 months or result in death,
Complete a five-month elimination period, and
Have paid into the Social Security system for a minimum number of quarters based on his/her age.

These are some thoughts to consider about disability insurance. Your Deloitte & Touche financial advisor also can provide information and should be consulted before any action is taken.