Eric Tyson - Personal Finance After 50 For Dummies

Long-term disability (LTD) insurance replaces a portion of your lost income in the event that a disability prevents you from working either permanently or temporarily for an extended period of time. For example, you may be in an accident or develop a medical condition that keeps you from working for six months or longer. During your working years, your future income earning ability is likely your most valuable asset — far more valuable than a car or even your home. Your ability to produce income should be protected or insured.

Even if you don’t have dependents, you probably still need disability coverage. After all, aren’t you dependent on your income?

The following sections detail why you should have disability insurance and help you determine the type of coverage you need to protect your income.

Most folks lack long-term disability insurance. The two main reasons people don’t obtain this important type of insurance are as follows:

Their company doesn’t offer it. Just three in ten workers are offered access to an LTD plan. Only 19 percent of those working for smaller employers — those employers with fewer than 100 employees — have access to an LTD plan. And just 6 percent of part-time workers have access to LTD insurance.

They don’t enroll. Even among those in the minority who have access to LTD, many people don’t enroll. A common reason folks bypass coverage is that they believe their chances of disability are rare. Another perception is that only old people become disabled. Both of these perceptions are wrong.

So why should you spend money and buy LTD? The answers are simple. If you want to protect your future employment income, an LTD plan is one of the best ways to do so. Here are some reasons you should have LTD:

Life is uncertain. You can’t know when and what type of disability you may suffer. That’s because many disabilities are caused by medical problems (arthritis, cerebral palsy, diabetes, glaucoma, multiple sclerosis, muscular dystrophy, stroke, and so on) and accidents (head injuries, spinal injury, loss of limb, and so on). Although older folks are at greater risk for more severe medical problems, plenty of younger adults suffer accidents or major medical problems leading to disability.

Many applicants for Social Security disability benefits coverage are turned down. You can receive payments only if your disability will result in death or if you aren’t able to perform any substantial, gainful activity for more than a year. Recent studies show that only about 35 percent of applicants for Social Security disability benefits are approved.

Even if you do qualify, your state’s disability plan and Social Security insurance programs probably won’t provide you with sufficient coverage, especially if you’re a higher income earner. State programs typically only pay benefits for one year or less, which isn’t going to cut it if you truly suffer a long-term disability that lasts for years. While one year of coverage is better than none, the premiums for such short-term coverage often are higher per dollar of benefit than through the best private insurer programs.Similarly, although Social Security disability benefits can be paid long term, remember that these payments are only intended to provide for basic subsistence living expenses. Those earning more than $40,000 per year find that less than half of their income is replaced by Social Security disability payments. As Table 2-2shows, the higher your income, the smaller the portion of your income will be replaced by Social Security disability.

Worker’s compensation, if you have coverage through your employer, won’t pay benefits at all if you get injured or become sick away from your job. Such narrow coverage that only pays benefits under a limited set of circumstances isn’t the comprehensive disability insurance you need.

TABLE 2-2The Portion of Your Income Being Replaced by Social Security Disability Benefits

Unless you’re already financially independent, you need long-term disability insurance during your working years. Generally speaking, you should have LTD coverage that provides a benefit of approximately 60 percent of your gross income. Because disability benefits payments are tax-free if you pay the premium for disability insurance you buy, they should replace your current after-tax earnings.

If you earn a high income and spend far less than that, you may be fine purchasing a monthly benefit amount that’s less than 60 percent of your income.

We recommend that your disability policy contain the following:

An “own occupation” definition of disability: This definition allows you to collect benefits if you can’t perform your regular occupation. For example, if you work as an accountant, your disability policy shouldn’t require you to take a job as a retail worker if you no longer can perform the duties of an accountant.

A noncancelable and guaranteed renewable clause: This clause guarantees that your policy can’t be canceled if you develop health problems. If you purchase a policy that requires periodic physical exams, you could lose your coverage when you’re most likely to need it.

A financially appropriate benefit period: Obtain a policy that pays benefits until an age at which you would become financially self-sufficient. For most people, that would require obtaining a policy that pays benefits to age 65 or 67 (when full Social Security retirement benefits begin).If you’re close to being financially independent and expect to accomplish that or retire before your mid-60s, consider a policy that pays benefits for five years.

A high deductible/waiting period: The waiting period is the “deductible” on disability insurance. It’s the time between your disability and when you can begin collecting benefits. We recommend that you take the longest waiting period that your financial circumstances allow, because doing so will greatly reduce your policy’s premiums. We generally recommend a waiting period of at least 90 or 180 days.

Residual benefits: This feature pays you a partial benefit if you have a disability that prevents you from working full time.

Cost-of-living adjustments: This provision automatically increases your benefit payment after you’re disabled by a set percentage or in step with inflation.