Inside Money: The case for having disability insurance

disabilityStudies show that before turning 55, people are more likely to suffer a disability that keeps them from work than they are to die. Yet, more people insure their lives than a possible disability.

One in four people will have a disability before retirement age that stops him or her from working, according to disabilityinsurance.org. The Social Security Administration puts the number at about 30 percent.

“This type of protection is extremely important for workers and their families since a disability can decrease or eliminate one’s earnings potential,” says Brian Kazanchy, a certified financial planner with RegentAtlantic Capital in Morristown.

Rather than take your chances, you may want to consider a disability insurance policy.

There are three ways to obtain disability insurance: group coverage offered by your employer, private coverage that you purchase from an insurance company or Social Security disability coverage.

“Most long-term disability policies will cover 50 percent to 60 percent of your base salary,” Kazanchy says. “Private policies offer the most flexibility to potentially acquire higher levels of coverage.”

Of course, that comes at a higher price than an employer group plan.

You’re also covered through Social Security, but the government’s definitions of disability are more stringent. Your disability must be considered “a medical condition that is expected to last at least one year or result in death,” Kazanchy says.

The definition of disability used by your insurer is vital. In general, you may be defined as disabled if you cannot perform your present job, known as “own occupation” coverage, or for any job, known as “any occupation” coverage, says Sean Keating, a certified financial planner with Patriot Financial Advisors in Eatontown.

For example, if your job is carrying boxes and you injure your leg, under “own occupation,” you would be considered disabled. If your policy covers “any occupation,” you would not be considered disabled because you could get a job that doesn’t require physical work, Keating says.

“Own occupation” coverage is generally more expensive because you would still receive payments even if you were able to find a different job in another field.

If you’re looking for a private policy, you apply just like you would for any other kind of insurance. You’ll find that age, gender, occupation, earnings, pre-conditions and more are taken into account by the insurance company.

Not all disability insurance policies are created equally, Kazanchy says, and the features you select will impact the price and quality of the plan.

You can choose different time periods for coverage, such as three years, five years or until age 65.

Then there’s the “elimination period,” the amount of time you must be disabled before the policy starts paying out. A shorter elimination period, such as 30 days, is more expensive than a 90-day period.

“Extending the period of time can help reduce premiums while still providing protection against a long-term disability that would have a more dramatic impact on your family’s financial situation,” Kazanchy says.

Also consider a cost-of-living rider that over time increases the monthly benefit based on inflation. This will make your policy more expensive, but it also could make a big difference should you need to collect benefits far in the future.

Other features include “non-cancellation,” which means the insurance company can’t cancel your coverage, and “waiver of premiums” for which you don’t have to pay the policy premiums while you’re collecting for a disability, Keating says.

Whether or not your employer coverage is enough depends on your income and expenses. Here are a few things to consider about your workplace plan:
If the definition of disability for your work plan is strict, it may not give the coverage you want or need, Kazanchy says.

Another issue is taxation. “The taxation of disability benefits can vary depending on whether you pay the premiums or if they are paid by your employer,” Kazanchy says. “If you pay, the benefits are tax free, and if the employer pays, they are taxable. This can have a big impact on the value of your potential claims.”

Plus, most employer plans are not portable. So, if you lose or leave your job, you probably can’t take the policy with you.