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Buying Disability Insurance

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What, you may think, me become disabled? Unfortunately, chances aren’t as slim as you may think. If you’re 35, your chance of becoming disabled for three months or more over the next 30 years – as a result of contracting cancer, suffering a stroke, or being hit by a car, for example – is three times greater than your chance of dying. Think of it this way: a disability insurance is the way to insure what’s likely your largest asset – your earning power. Here’s how to get the coverage you need:

Generally speaking, you should have enough disability coverage to replace at least 60% of your gross income while a long illness or injury prevents you from working. In fact, that’s usually the most coverage that insurers will sell you (though some will sell as much as 70%). If they provide much more coverage, they figure, you’ll have little incentive to return to work. The best policies start paying benefits no more than 90 days after your disability occurs and continue to pay until you can work full-time again or reach age 65.

Large corporation often offer their employees a group long-term disability plan (typical percentage of pretax salary replaced: 40% to 60% up to a specified ceiling). If you don’t own such a policy, ask your benefits department if one is available. Your employer may also offer short term disability coverage to bridge the gap between when your sick leave runs out and a long-term disability policy kicks in. Some states, including New York and California, require that most employers provide short-term disability benefits (usually for 26 weeks).

But if you work for one of the two-thirds of U.S. companies that don’t offer disability coverage, you’re self-employed, or you work for an employer whose benefits fall below the 60% threshold, look for an individual policy sold by a life insurance company. Buy the highest-quality coverage you can get and be prepared to pay a bundle for the policy; the cost for women especially is rising because fewer and fewer insurers offer unisex policies. Provisions to hold out for, if you can afford them:
• Own-occupation coverage. This means that the policy will pay in the event that you develop any disability that prevents you from performing your own occupation, even if you are still able to do other kinds of work. For example, with such coverage, an airline pilot who went blind would collect benefits even though blindness wouldn’t prevent him from being, say, a deskbound administrator. You can keep receiving benefits even if you earn money doing something else, as long as you are under a doctor’s care. This coverage costs big time: 10% more, on average, than a policy that will pay benefits only if you are unable to work at any occupation suitable to your training and experience. And this feature is becoming harder and harder to find.

• Residual benefits. This mouthful simply means that you can return to work part-time while you are recuperating and still collect partial benefits. If you’re policy doesn’t have residual benefits built-in, pay the extra 25% or so and have it added as a rider.

• Annual cost-of-living adjustments. With this feature, your benefit payments will rise with inflation every year.

• A no cancelable contract. This feature means that the company must insure you without raising premiums or lowering benefits as long as you continue to pay the premiums. Like own-occupation coverage, no cancelable contracts have been becoming scarcer.

• Guaranteed increase. This is simply the option of buying more coverage later without having to undergo a medical exam.

• Guaranteed level premiums. By getting guaranteed level premiums, you’ll prevent the insurer from raising your premiums later. Again, this coverage is getting scarcer.

The size of your annual disability premiums will depend on your age, occupation, how much income you want replaced, and how many months you’re willing to wait before benefits kick in. Take a 40-year-old, nonsmoking, $80,000-a-year professional man. At large disability insurer UNUM, premiums for his policy, which begins paying 90 days after he becomes disabled, total roughly $1,800 a year. Many policies sell for $2,500 a year or so, however.

The best way to trim your premiums is to accept the longest waiting period (also known as “elimination period”) you can. That’s the length of time you must be disabled before the insurance company starts paying benefits. Accepting a 180-day rather than the standard 90-day waiting period, for example, can save you several hundred dollars a year.

If you automatically get employer-provided long-term disability coverage, your employer sometimes lets you buy more. But the insurer it uses may not offer the lowest available rates, so it pays to compare premiums among several insurers. At the very least, check with any professional organizations to which you belong, such as the American Institute of Certified Public Accountants or the National Association for Female Executives. Such groups often can negotiate cheaper rates than a large company.

If you plan to leave the corporate world to strike out on your own, you may not qualify for disability insurance anymore – at least at first. Because people starting their own businesses don’t have any income yet, they can’t insure it against income, have the same problem. One solution: Buy an individual policy before you quit your job.

Many people don’t realize that the Social Security System provides disability benefits, too. But you must be pretty bad shape to qualify: you’ve got to prove that your disability will keep you from working at any kind of job for more than a year or is fatal. Furthermore, these payments don’t kick in until five months after your disability sets in. Your salary and the number of years you’ve worked determine your benefit amount.

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