No one likes to think about becoming disabled. But it happens far more often than you may think. According to the Social Security Administration, a 20-year-old worker has a three-in-ten chance of becoming disabled before reaching retirement age. The most recent Census counted 49.7 million people with some type of long-lasting health condition or disability. That's nearly 20% of the U.S. population over the age of four.
Basically, a disability is any condition that makes it difficult or impossible for a person to perform one or more activities of everyday living, such as moving around, getting dressed, or communicating with others. A disability might be physical, such as mobility impairment, blindness, or deafness; mental, including learning disabilities, Alzheimer's, and depression; or developmental, such as Down syndrome or autism.
Not surprisingly, financial planners recommend that anyone who works for a living include disability income insurance in their overall financial plan. Without adequate coverage, an unexpected period of disability could wipe out your personal savings and investments in short order and, potentially, leave you and your family with no income.
If you have insurance through your employer, take a close look at the policy. Find out just how much coverage you have. Be sure you have a clear understanding of the circumstances under which you would receive benefits, how much you would receive, and for how long.
A typical group long-term policy covers only 50% to 65% of an employee's salary. These benefits usually are taxable income, so the amount you'll actually receive will be less. Be aware that the definition of 'disability' differs from one policy to another. Read the policy's fine print and ask questions if you're not clear about the limits on your coverage.
When you buy disability insurance for yourself, do your homework carefully. Don't duplicate any group insurance you already have. Look for a policy that classifies you as disabled if you're unable to perform your regular job ' as opposed to being unable to perform any job ' for a certain period of time.
Many policies pay benefits only in the event of total disability. So, if you can function on a part-time basis at your regular occupation, you won't be able to collect any benefits. For an additional fee, you can add a 'residual' rider to your contract, which will give you coverage even if you are able to earn some income.
Fine-tuning Your Benefits
Disability policies that are noncancelable or guaranteed renewable are generally the best choices. As you compare different policies, pay attention to how long you must wait to start receiving benefits after becoming disabled. Under a standard contract, you may have to wait as long as 90 days. For a small cost, you can choose a shorter waiting period. With most policies, disability payments end when you become eligible for Social Security retirement benefits. Adding a rider to your policy can extend your coverage for life.
Some policies offer inflation protection so that your benefits keep pace with increases in the cost of living. Others allow for projected increases in benefits to compensate for the raises you might have earned on the job. In addition, you might want to consider adding a catastrophic disability benefit (CDB) rider. A CDB rider provides additional benefits if you should suffer a major disability that results in expenses that go beyond your normal income needs, such as the cost of a home health-care aide.
Your ability to earn an income is one of your biggest assets. It's your means of achieving your life goals and providing your loved ones with financial security. So insuring that income with disability income insurance makes good sense. For a review of your disability income needs and coverage, talk with your financial planner.