Quick Facts on Disability Insurance
by Tony Novak
§ The sole purpose of individual
disability insurance is to replace your after-tax income in the
event of an accident or illness. These policies do not provide protection
from medical expenses or recovery of damages for “pain and
suffering”.
§ Since the benefit payments are
designed to be income tax-free, insurance coverage in the amount
of 2/3 of your salary is roughly equivalent replacing your net take-home
pay. This is usually the maximum amount of insurance that you can
purchase.
§ Be prepared to show the insurance
company a pay-stub is you are salaried or an income tax return if
you are self-employed to prove the amount of insurable income.
§ If you are self-employed, you
can only insure the amount of net income that you reported on your
tax return, even though your actual earnings might be much higher.
In this case, you might want to supplement your insurance with “business
overhead coverage” that does not depend on net income.
§ Expect the insurance policy
to exclude or limit coverage for pre-existing conditions. If you
have a bad knee, for example, expect that your policy might have
a 5 year rider on claims due to knee injuries.
§ Most policies are issued for
a term of five years of coverage, although you can buy a longer
or shorter benefit amount.
§ Most policies have a 90 day
waiting period before you can begin collecting a benefit, but you
can buy longer or shorter waiting periods.
§ Most policies integrate with
Social Security disability insurance. This means that the total
amount of the benefit you collect will not exceed your net after-tax
income before you were disabled.
§ Most policies may be continued
year after year until you retire. But the average life of a disability
insurance policy is about 5 years.
§ The average time required for
an insurer to review an application is about 3 weeks. The insurer
may request copies of medical and financial records.
§ Applications are still
submitted on paper; no online enrollment system is available.
§ Expect the premium cost to be
about 2% of your salary if you have a “desk job” and about
4% of your salary if you work with your hands. Of course, this is
a very rough guideline, and the actual cost will depend on a greater
number of individual factors.
§ When a policy is issued, you
have at least 10 days to review all of the details and cancel the
coverage if you are not completely satisfied. It may be useful to
have an independent financial adviser review the new policy during
this period.
§ Assuming that you keep disability
insurance for the balance of your working career, the probability
of suffering a loss of income due to accident or illness sufficient
to trigger a claim under your policy is about 1 in 4.
§ If you become disabled, you
should consult with an attorney who specialized in disability insurance
claims before filing a claim with the insurer. This may help avoid
delays and disputes regarding the claim.
About the author:
Tony Novak, MBA, MT, is a financial adviser based in Narberth, Pennsylvania.
He is editor/publisher of “Tax and Benefit News” and moderator
of the tax forum for financial planners at “Financial Planning
Interactive”. He is available by telephone at 1-877-529-7435
to address public inquiries on tax and benefit planning issues free
of charge through OnlineAdviser service sponsored by www.MedSave.com
and www.FreedomBenefits.com.
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