Income Protection Using Disability Insurance

If you were unable to work for an extended period of time due to illness or injury, what would happen to your income? How you would pay your regular monthly bills, such as your mortgage or rent, utilities or medical care?

Think you're already protected? Think about this:

• Social Security disability payments are limited to disabilities expected to last at least 12 months or end in death. To qualify, you must be unable to engage in any type of work.
• Personal savings can best be used to build a comfortable future. Add up your monthly bills, then multiply by 12 and you can see how fast even substantial savings can be depleted by unexpected illness or injury.
• Long-term disability insurance offered through your employer is a start. But workplace disability benefits often cover only about 50% of your income. Can your family survive on half of a paycheck?

Many workers who become injured or ill for an extended period rely on disability insurance as a vital source of regular income to help cover essential financial needs while they are unable to work. Disability insurance is designed to replace a portion of your regular salary, typically around 60% to 70% of your gross pay, in the event of an injury or illness that prevents you from performing the functions of your job.

Disability insurance is sometimes available through your employer. This is usually the easiest and most affordable way for individuals to obtain disability insurance coverage. If your employer does not offer disability insurance, or if you are self-employed, you can purchase an individual disability insurance policy and pay the premiums on your own.

Some people believe that worker's compensation insurance would provide them with income in the event they become injured or ill. But there is a significant difference in coverage between disability insurance and worker's compensation insurance.

Worker's compensation insurance only provides you with benefits if you become injured or ill on the job. If you are injured outside of work, such as in a car accident, or if you contract an illness that is unrelated to your occupation, you would not receive any benefits from worker's compensation coverage.

On the other hand, disability insurance would provide you with regular income regardless of whether you become injured or ill on or off the job. This is where disability income insurance is an important consideration for your overall financial plan.

Many insurance companies provide disability income insurance protection, both on an individual basis and through employer plans. Since policies can vary significantly, here are some important considerations when shopping for an individual disability insurance policy:

• Quality of provider
  Like all insurance products, the coverage and benefits you receive are only as good as the provider behind them. Consider policies from well-known insurance companies with strong ratings from independent insurance rating firms such as A.M. Best. Also, look for providers who specialize in providing disability insurance coverage. These insurers typically are well-acquainted with the complexities of disability insurance coverage.
  
  
• Guaranteed renewable benefits
  Some disability insurance companies require that the insured person re-qualify for coverage on an annual basis when the policy comes up for renewal. You should only consider those policies that are guaranteed renewable each year in order to avoid the trouble of re-qualifying for coverage.
  
  
• Definition of occupation
  An important question you should ask before you purchase a disability insurance policy is the definition of disability. There are two basic definitions concerning when benefits will be provided: If you cannot perform your current job or if you cannot perform any job. This is a significant difference, and one that can have a considerable impact on the cost of the coverage and whether or not you receive benefits.
  
  Owner's occupation coverage provides benefits when you cannot perform the duties of your current job and is a more liberal interpretation of disability. This definition of owner's occupation may well be worth the higher premium cost. A definition of disability based on the inability to perform any job is a strict interpretation of disability and is a difficult qualification to meet. This definition can make it harder for an individual to receive full income-replacement benefits.
  
  
• Illness and injury
  Because you may be just as likely to be out of work due to an illness, make sure the policy provides benefits whether you are unable to work because of illness or injury.
  
  
• Residual benefits
  Residual benefits will pay you a portion of your salary if you are able to work only on a part-time basis. Instead of all-or-nothing disability income benefits, residual benefits provide an income based on how much you can work.
  
  
• Elimination period
  Most policies come with a three to six month waiting period (the "elimination period") before you begin to receive benefits from the insurance company. The elimination period you choose should be determined by the amount of personal savings you have. Those with low savings should choose a three-month waiting period; if you have more than three months of savings, you may be able to choose a longer elimination period and reduce your disability income insurance premium costs.

Dearborn & Creggs Can Help

Income protection is an important component of a sound financial plan. Your Dearborn & Creggs financial representative can help you determine whether disability income protection is right for your unique situation and, if so, the policy and terms that best meet your needs.