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How long could you maintain your present living standards without your current income? For almost anyone who works for a living, to be disabled and to be unable to earn an income, even for a short time, can mean financial stress – and even disaster.
Disability income protection is designed to replace the income lost as a result of disability from illness or accident by protecting your earnings and your earning potential – perhaps your most valuable asset.
Anyone can get sick. Anyone can have an accident. Anyone can be out of work for over three months and lose their income.
In fact, today, because of impressive progress in the medical field, many lives are saved from premature death caused by accidents or sickness. Because of this, an increasing number of survivors live on, but with impairments or limitations that mean they can’t perform the major duties of their own occupation. In short, they lose their current income but not their life. Their quality of life may diminish.
Statistics show that the probability for long-term disability for at least 90 days before you reach age 65* is high. If such a long term disability does occur it can at minimum have a devastating impact on your savings, at the very least.
If you’re like most people, you have only two months savings in the bank as a protection against emergencies. Yet the average long-term loss of income due to disability is 5.5 years.*
Even if you save ten percent of your income for ten years, it may take only one year of mortgage payments and meeting other bills to devastate your savings completely. Now the question is, what will you have to live on for the next four years? Today, your income is doing a double job for you. It provides for today’s necessities and helps you save for tomorrow’s hopes.
But if a disabling injury or illness strikes and you have no income, your needs for the basic necessities will continue. You’ll still be obligated to meet the mortgage, car and credit card payments, as well as medical costs not covered by your insurance. But plans for a comfortable retirement, the children’s education and a better life may have to be put off, if not discarded altogether.
Commissioners Standard Ordinary Mortality and Disability Tables, 1985 and 1964 (most recent data available).
You may feel that your disability plan provided by your employer will be adequate. Many people find out after they’ve become disabled that this is not true. According to the Department of Labor, only 41 percent of companies that employ more than 100 employees provide long-term coverage. *In companies with fewer than 100 employees, only 19 percent had long-term disability benefits.**Facts you should know about Workers’ Compensation and Social Security Disability Benefits.
Workers’ compensation benefits vary by state. According to the 1994 Analysis of Workers’ Compensation laws, benefits can be as low as $100 per week. You can find out what your state pays by calling the U.S. Chamber of Commerce. The important thing to remember is that workers’ compensation pays for disabilities that occur on the job which occur only 38 percent of the time (Accident Facts, 1994 Edition).
Social Security disability benefits are difficult to receive because their definition of disability is very restrictive. In 1993, Social Security received 1.4 million applications for benefits and 55 percent of the applications were denied. (Social Security Bulletin–Annual Statistical Supplement, 1994).
Even if you did qualify, the benefits you receive may be far below what you would need to maintain your current lifestyle.
* Employee Benefits in Medium and Large Private Establishments, 1993
** Employee Benefits in Small Private Establishments, 1990
Below are some of the common terms, benefits and features available in disability income policies.
Benefit or maximum period: This is the length of time benefits would be paid for a disability. The longer the maximum period, the higher the premium.
Benefit amount: The benefit amount is based on the income being earned at the time of purchase. Most policies limit benefits (from all sources) to no more than 70 to 80 percent of monthly income, so there is an incentive to return to work. Generally, people with lower incomes will receive a higher percentage of their pre-disability income than higher paid workers receive.
Future purchase or guaranteed purchase option: This option allows you to increase coverage as your income increases. It can be an important feature if income is likely to rise.
Guaranteed renewable or non-cancelable policies: A guaranteed renewable policy guarantees to provide coverage as long as you continue to pay premiums. The premium cost could increase with this type of policy. A non cancelable policy guarantees to provide coverage if you pay the premium, and also guarantees that the premium will not increase.
Indexed disability income benefits or cost-of-living adjustments (COLA) : After a year of disability, indexing or COLA adjustments may help to make your benefit payments “inflation proof.” Indexing will adjust the monthly benefit amount based on the Consumer Price Index or by a specified percentage.
Partial or residual disability benefits: Partial disability benefits usually pay a set amount for a set period of time. For example, your DI policy states you will be paid half of the monthly benefit for six months if you should be injured or sick and meet the definition of total disability. Residual benefits usually allow for payments that are proportional to the loss of income if you’re injured or sick and are unable to work, but have a loss of earnings. Some policies require total disability for a period of time before residual or partial benefits would be paid.
Total disability: Some policies define total disability as the inability of the insured to perform any work for which he/she is qualified. Other policies will define total disability as the inability of the insured to perform the duties of his or her own occupation. Some policies may change occupation definitions after a specified period of disability.
Waiting period or elimination period: This is a period of time after disability occurs for which you will not receive benefits. Select a waiting period based on the maximum length of time you will be able to meet your expenses with short-term savings. The shorter the waiting period, the higher the premium.
Waiver of premium: Many companies offer a benefit that allows you to discontinue premium payments during disability.
These are some of the many features available in the disability income insurance industry today. You will want to work closely with an insurance representative to tailor a disability income insurance plan that meets your needs.