Physical
disabilities are giving way to mental and emotional disabilities, which are
very difficult, if not impossible to measure. Given these trends, you need
to have a sound understanding of how disability policies will perform in
current marketplace. Because the average persons likelihood of becoming
disabled before retirement is greater than dying, disability exposure is a
bigger risk than many people realize.
A disability
policy covers both accidents and sickness. Coverage is provided for a period
of years, such as one, five, or ten, or through a specific age, including
age 65, 67, or for life.
Long-term vs short-term
disability policies
Long-term
disability is more important than its short-term cousin because the
ultimate exposure is greater. Therefore, your should choose policies that
pay for remainder of your working life. Age 65 would be appropriate, since
most people will stop working by then. Remember, the whole purpose of
purchasing disability insurance is to protect you against the loss of earned
income.
The waiting or
elimination period is the your deductible; just like health insurance, you
satisfy deductible first and then insurance company takes over. Generally,
the longer the waiting period, the cheaper the premiums. You should choose a
waiting period of 90 days, since you will normally get the most for your
money in that instance. This out-of-pocket deductible should be paid from
the emergency fund reserve you set up during the planning process.
Finally, a good rule of thumb is
to buy as much disability insurance as you can for yourself. Today, your can
generally purchase anywhere from 60% to 70% of your monthly income. Any more
than that creates a moral hazard, since people who purchase more are more
likely to abuse the system. Policies also have provisions relating to
income an insured may have from other sources such as Social Security or
disability benefits under a corporate plan. Many times, income from these
sources offsets the
policy's benefits payable.
Other disability coverage in
effect not adequate
Often you say that
you have disability coverage. But when I examine it more closely, I discover
policies previously purchased are old and coverage amount represents what
you were earning when you purchased policies many years ago. Since then,
your income (s) have often doubled or even tripled, which means coverage is
vastly underinsured. So we must review whether level of income provided for
in a other policy or policies is appropriate to satisfy you and your
spouses current lifestyle needs.
Own occupation vs. modified own
occupation
The most important
aspect of either a group or an individual policy is found in the definition.
The definition of disability spells out when the insured will be considered
totally disabled.
The most liberal
definition of disability protects you and your spouse in your "own
occupation." Under this definition, if the insured(s) cannot perform the
duties of his or her own occupation, benefits will be payable unless the
insured enters another occupation. This definition is becoming more
difficult to find because of unfavorable loss experience, but it is still
attainable. We will just have to shop around a little more.
Other common
definitions today are less useful. Under "modified own occupation," the
insured must be unable both to engage in his or her own occupation and to
work in any gainful or reasonable employment. Under "split definition,"
disability is defined as a two- part process that includes inability of
insured to engage in his or her own occupation for some initial period,
usually two years, followed by inability to engage in any occupation for
which he or she is suited or might become qualified after that period.
Under these
scenarios, it is typically in the best interest of insurance companies to
try to put the insured back into the workforce and get him or her off its
payroll. If the insured refuses, then the insurance company may reduce or
sometimes even eliminate the benefit.
Most short-term policies have the
narrowest definition,
called "any occupation."
However, when
planning for client disability, you need to focus on long-term exposure.
Partial and residual disability
What happens if
you or your covered spouse do not become totally disabled? Life is not
always black and white. Sometimes that gray area mixes in and causes
controversial and harmful results. Since most policies provide for total
disability, you need to include language in the policy that provides for
partial and residual disability .You also need to include
language that provides coverage should the insured's disability repeat
itself. That's called recurrent disability.
Partial disability
.Partial disability is usually defined as the inability to perform some
specified percentage of duties of insured's usual occupation (loss of job
responsibilities). If you or your covered spouse cannot perform duties of
his or her job, it is presumed that corresponding income will decrease.
However, partial disability doesn't reduce income this way; instead, it is
based on inability to perform specified percentage of functions that
constitute insured's normal job. The payout for partial disability is half
of the monthly benefit for total disability.
Residual
disability.
Residual disability provides coverage based on loss of
income, not on loss of job responsibilities. This provision initially
developed as an offshoot of own occupation definition, since once a disabled
insured began receiving benefits under own occupation, there was little
incentive for him or her to go back to work..
With residual
disability, insured has an incentive to return to work and get paid l
accordingly. If the insured goes back to work half time, then insured would
receive 50% of benefit, since other 50% would be fulfilled by insured's
earnings from job. To collect, insured(s) must have at least a 20% income
loss to be eligible for this benefit.
Recurrent
disability
Recurrent
disability outlines what happens if the insured becomes disabled from a
pre-existing disability and how much time must lapse between disabilities
before benefits are paid out again. This is important for two reasons.
First, consider an
insured who suffered a disability for several months and then attempted to
return to work for a few days, but was unable to do so. Without language
defining recurrent disability in contract, the insurer might unreasonably
require that another elimination period be fulfilled before resuming payment
of benefits.
Second,
consider an insured with a contract that pays benefits for two years who was
totally disabled and collected benefits for that maximum period of time.
Without language defining recurrent disability in contract, the insured
could return to work for a short period of time and then try to recycle the
entire two-year benefit period. Recurrent disability clause clarifies these
issues and usually states that disabilities that recur within six months
following the original disability are deemed to be a continuation of
original disability. With a benefit period to age 65 or longer, recurrent
period is usually one year.
Non-cancelable and guaranteed
renewable policies
Most contracts
sold are through group plans. However, individuals need to acquire
disability coverage as well. To ensure that individual coverage continues,
two types of provisions are available: non cancelable or guaranteed
renewable.
·
Non-cancelable policies.
Non-cancelable policies have a
liberal continuous term contract guaranteeing the insured the right to renew
for a stated number of years, or to a stated age, with premium at
renewable date guaranteed. Because of this guarantee, non-cancelable
polices are most expensive type of continuance provision. Because of
claims experience, they are also becoming difficult to find, just like
own occupation
policies.
·
Guaranteed renewable policies.
Guaranteed
renewable policies protect against cancellation and give insured the right
to renew the policy, but with a provision permitting the company to
adjust premium for an entire class of insureds. Although premium rate for
renewal is not guaranteed under the guaranteed renewable contract as it is
under the non-cancelable contract, the company may only increase the rate
for an entire class, not a single individual.
If the insured
becomes disabled after a change of occupation, then insurance company will
make some adjustments to the policy benefits. If the occupation is more
hazardous, and insured files a claim, then insured will have his or
her benefits adjusted downward to reflect more hazardous occupation or
greater risk to the insurance company.
Taxability of benefits
The taxability of
disability policy benefits depends largely on who is paying the premium. If
the insured is paying the premium, then benefits received are not taxed. If
the employer pays premium on behalf of the employee, then the benefits
received are taxable. In no instance are premiums deductible for income tax
purposes.
Sick pay is treated the same as wages for taxation purposes.
If the employee is obligated to pay a portion of the premium, then benefits
are taxed on a pro-rated basis.
A disability
income policy is more important than any other type of insurance policy for
obvious reasons. If your become disabled, you compromise your most important
asset, the ability to earn income. More importantly, ability to keep pace
and accomplish your lifelong goals is lost forever.
Disability
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