PRODUCTS & SERVICES > Disability Insurance

Most people insure their lives, effectively insuring that they will be able to provide income for their families in the event of an untimely death. These people believe that they are doing everything reasonable to prevent any undue financial burden from affecting the lives of loved ones. However, less than 15% of these people buying life insurance choose to insure something that is much more important -- the ability to earn income should they become disabled.

In our world of ingenious safety devices and revolutionary medical technology, the odds increase every day that you will be disabled by an accident that would have killed someone a decade ago. One out of eight people will be disabled for a significant period in their lifetime. Think it couldn't happen to you? Consider for a moment whether or not you know someone laid up because of a joint injury or back problems -- particularly related to an automobile collision. Heck, pregnancy can even be a disabling condition, depending on how difficult the pregnancy is.

Although everyone worries about death and buys life insurance, disability is more insidious. Not only can a disabled person not work, but that person normally has to undergo extensive medical regimes while still incurring the everyday costs of living. Surprisingly, 48% of mortgage foreclosures are the result of disability -- more than result from death. Even health insurance is not enough. A Journal of the American Medical Association study of 2,000 seriously ill people found that although 96% had medical insurance, 31% still lost everything they owned because of the disability. This is because the disabled person still had to do things like eat and, given that they were disabled, required extra care from family or paid help that used up funds beyond what they might have earned.

But Disability Insurance Is So Expensive!

Many people looking at disability insurance are put off by the price tag. Term life insurance is so much cheaper. Permanent life insurance builds up cash value. But you seem to pay permanent life insurance prices for disability insurance without getting any cash value. Other people for some reason think that they are invulnerable. Although they know they are not immortal because all people eventually die, who can imagine being temporarily or permanently hurt so badly that you cannot work? Although it happens all of the time, because it is not guaranteed, people comfort themselves by thinking it could not happen to them.

The simple truth is that disability insurance is expensive because there is a much higher chance you will actually use it. Insurance companies depend on people to underestimate their life span and buy life insurance they will not use. After people have a nest egg and the kids are gone, they stop paying the premiums -- just when they are likely to die. With disability insurance, people of all ages have equal risks, making it much more likely you will need it. Many households with two breadwinners need disability more than they need life insurance, given how expensive it can be to care for disabled person.

Standard Disability Insurance

Standard disability protects your ability to earn income. If for some reason you become disabled in the way that the insurance agreement stipulates, you begin to get payments from the insurance company that replace what you would have made on the job. However, you need to be even more careful when buying disability insurance than with almost any other kind of insurance. Each policy is very different, so you have to pay attention to the fine print. Because of the high likelihood that the insurance company will have to pay, some insurance companies will stick in conditions that decrease that likelihood. Although this often makes the insurance seem cheaper, it actually decreases its utility to you.

Although a large number of employers offer life insurance, very few offer disability insurance. The lapse may actually work out in the favor of the people who pay for the insurance on their own. This is because if the employer pays for the disability insurance as part of your benefit package, the payments you get (if you do get them) are taxable income. Disability income is also taxable if you take the disability insurance as a tax write-off -- something you should really think about before you do it. However, if you pay for the disability insurance out of your own pocket, the payments come to you tax-free. Additionally, a disability policy that you pay for will follow you around from job to job and will allow you to be covered even if you are taking time off from work to do crazy stuff like have babies, go back to school or spend more time with the kids.

Shopping For Disability Insurance

When shopping for your own policy, you want to ideally find one that is guaranteed and non-cancelable. Guaranteed policies are policies where the payment is fixed. Non-cancelable policies are ones that stay in effect as long as you pay the premium. Because of the likelihood you will need the disability insurance, these two concessions are important. They help ensure that the policy covers you when you need it and that you do not have to drop the policy because you cannot afford it. Although sometimes people cannot get guaranteed or non-cancelable disability because of pre-existing conditions, it is worth trying.

The next thing to do is check out the definition of disabled. You need to be insured for your chosen occupation. Sometimes a disability will stop you from working your current job but will still let you do other things. However, many times you have to take a pay cut to do those other things, which is never nice. Also, look for partial coverage of partial disability -- not all disability insurance companies offer this. If you can get covered for a partial disability it can mean the difference between over-extending yourself and worsening your condition and being able to get by doing whatever amount of work is deemed prudent.

The last things to look for have to do with the actual nature of the payment. A rider that has the payment rise along with inflation can be a nice thing to ensure that the purchasing power of your insurance does not drop. You also want to have the payment rise in sync with your income -- if you bought the insurance when you made $23,000 and now make $35,000, it would be unfortunate if you only were covered for 60% of $23,000 versus 60% of $35,000. Also, the ideal policy would pay until you retired, if in fact you were that disabled. Some policies will do this, although many will stop paying after five or ten years. Finally, the higher a percentage of your income the disability insurance will pay, the more money you will get.

The one area where you can save quite a bit of money on a policy without unduly burdening yourself if you are prepared is the waiting period. Some policies kick in immediately, some after 30 days, some after 60 days and some after 90 days. The more time it takes, the lower your premiums will be. If you can squirrel away some money and actually survive a longer waiting period, your savings can actually really add up over time -- particularly if you get to invest them. Over time, in fact, these savings could replace the nest egg you were originally sitting on in order to justify the longer waiting period, allowing you to create wealth for yourself instead of handing it over to the insurance company.

One thing you don't need when you buy disability insurance is a "return of premium rider." Some disability insurance policies will hike the annual costs and give you in return the right to get 50% of your money back if you do not use the disability insurance. For starters, because they increase the cost, you actually are only getting 30% to 40% of your money back at best. In addition, if you don't think you will use the disability insurance, why buy it at all? The whole point of buying disability insurance is in case you need it, and paying the minimum amount to prevent the financial consequences of a disability. Buying the right to get some of your premiums back on top of that takes away investment income and only offers the return of a minority share of the premiums, a bad deal all around.

Long-Term Care Insurance: Disability Insurance For The Retired

One of the unprecedented features of the late 20th century is the fact that people are getting older and older. Not only are advances in safety and medicine keeping more people alive (and increasing their risk of being disabled), but the average life span has jumped more than 30 years since the beginning of the century. With the 65 and up group being the fastest growing segment of the population, the need for long-term care insurance is increasing for anyone who is retired and has a chance of needing long-term care of some kind. In fact, it is really disability insurance for the retired, and about as under-utilized, as well.

The statistics surrounding disability among people over 65 are pretty staggering. Two out of five people over 65 will need long-term care for at least a few months. Put another way, seven out of ten couples will see one partner go into a nursing home. With the average cost per year in a nursing home at $50,000 and rising, it is no surprise that more than half of the couples who see one spouse go into the home are reduced to the poverty level by the experience. After only 13 weeks, more than half of the people who have gone into a nursing home have spent themselves into poverty. The simple reality is that if you are 65 or older, you should have a long-term care policy in place to prevent economic hardship from being visited on your spouse, your children or other loved ones. Again, next to life insurance, this is a much more compelling need.

Won't The Government Help?

Medicare, the federal government's health insurance for the 65 and up crowd, unfortunately does not cover expenses related to long-term care. Just like your health insurance won't pay for you if you become disabled, Medicare does not pay for people over 65 who end up needing custodial care of some kind. Medicaid, the government's welfare program for the poor and indigent, will pay for long-term care, but only if you are poor. The desire to take advantage of this by transferring all of your assets to the kids often takes on bizarre twists and turns that simple long-term care insurance policies would have negated.

Besides the fact that transferring all of your assets to your kids sometimes only proves that your kids are more spoiled than you thought, the government frowns on it. The IRS will tax you on anything that violates the $10,000 per year per person gift tax rule at a rate that starts as low as 37%. Even if you do this, if it is within 36 months of you applying for Medicaid, you will be denied anyway. On top of that, if you file a claim and it has been less than 36 months, Medicaid will restart the ol' timing device right back at 36 months, leaving you over-taxed by the IRS with your assets at the mercy of the whims of your children. Because, like it or not, technically you will have impoverished yourself to take advantage of a government program and taken on some risk to do so -- all because you did not want to be properly insured.

Buy Early And Other Shopping Tips

Long-term care rates are simplified in that you can purchase the insurance at any time after you turn 50 and get a flat rate that will probably not change much as you get older. Although you will probably not need the insurance until you are in your 70s, the disparity in rates makes this one of the few instances where getting in on insurance early may make sense. Although insurance companies can file to raise rates for a class of policy holders, unlike many other types of insurance, the company cannot raise your rates outside of any inflationary limits disclosed in the policy. Additionally, as serious illnesses often preclude people from getting long-term care insurance, buying it when you are still spry and in your 50s can avoid a lot of heartache later when the inevitable deterioration of your corporeal form begins -- hopefully, around age 114, but you never can predict these things.

Much like disability insurance, one way to minimize the cost is to delay how quickly it takes for benefits to kick in. If you have a nest egg, this can mean a dramatic difference in how much your premiums are. Also, if you limit the daily costs to cover only part of what a nursing home would require and use social security or other retirement income to fund the balance, you can reduce the premiums as well to a more affordable level. As always, you want to try to get insurance where the pay out increases with inflation, where you get the maximum coverage that you can, where no prior hospitalization is required, where home health care is covered in case you don't want to go to a nursing home, and where your costs will be covered no matter what type of nursing home you go to. One dodge these companies will try is only paying for "skilled care," which all of 1% of long-term care patients require. Finally, many policies will let you stop paying after you receive benefits for 90 days for very little in additional monthly fees.