Is Your Paycheck Protected?

By Kerry Peabody, CSA, CLTC Long Term Care, Life & Disability Insurance Agent

You’ve insured your home, your car, your boat – but have you insured the one thing that makes all of those other things possible – your income? How long would you be able to maintain your financial independence if you were unable to work for several months, or a year? What if you were forced to retire tomorrow due to a serious medical condition?

Disability is far more common than people want to admit – roughly one in eight workers is expected to become disabled for five years or longer during their working years, and the average private disability insurance claim lasts just under three years. Many people think that accidents and injuries are the most common cause of disabilities, but roughly 90% are actually the result of an unexpected illness, such as cancers, cardiovascular problems, or musculoskeletal issues.

As a real estate professional, you’ve probably seen a home listed because the family has to sell for financial reasons. Medical expenses and job loss are the top two reasons for bankruptcy, so imagine becoming ill, piling up medical bills, and being unable to work because of that illness – a disastrous situation for anyone – especially a family.

That’s where individual disability insurance can make the difference. A good disability insurance policy will cover up to roughly 60% of your income. Your first reaction is probably “But that’s just over half… I can’t survive on that!” You need to understand, that when you buy individual disability insurance, you’re going to pay your premiums with after-tax dollars. So, when you receive disability benefits, the benefits won’t be taxable as income. A realtor making $100,000 a year could qualify for roughly $5,080 per month in non-taxable benefit – that’s $60,960 of non-taxable benefit if you’re disabled. It may not buy you a new beach house, but it will certainly help keep your bills paid.

With all of this in mind, when you start looking for coverage, you need to shop wisely. There are several very good disability insurance products on the market – and a few not-so-good ones. When you’re shopping for coverage, here are a few things to keep in mind:

1. What’s the policy’s definition of disability? Is the policy you’re considering an “own-occupation” policy, “modified own-occupation, or an “any occupation” policy? This will have a significant impact on when and how the policy will pay a benefit. Your agent should be able to explain the difference between these definitions, and tell you how the plan you’re considering works. In most cases, you’ll want to avoid “any-occupation” policies.
2. Is there a benefit for partial disability? For instance, what if you become ill, and as a result, you need to reduce your hours by 40% while you’re being treated or recovering? When you your income decreases in turn, will you be able to collect a partial benefit, for the partial disability? If the policy does offer a partial or residual disability benefit, does it require you to be totally disabled first? (The good policies don’t.)
3. What’s the Benefit Period – how long will it pay for a disability? 2 years? 5 years? All the way to your normal retirement age?
4. What’s the waiting period – how long do I need to be disabled before the policy will consider me eligible for a benefit? Typically, people choose a 60 or 90-day waiting period.
5. Do you expect your income to increase over the next several years? If so, be sure to consider a “Future Increase Option” rider. This lets you buy more coverage as your earnings increase, even if your health has changed for the worse.
6. Does it offer a Cost of Living Increase rider? If you’re disabled for a long period of time, the COLI rider will give you a raise each year. The younger you are, the more important this rider is.

All of these factors will affect your price, as will your occupation, your age, and your health.

A well-designed disability insurance policy will be affordable and effective, and will help you pay the bills if you become disabled. However, if you buy an inferior, poorly-designed plan, you’ll regret it when you need help the most. Shop wisely. Work with an independent agent who represents several different companies, and can help you compare the various plans. Don’t give up valuable coverage or better contract wording just to save a few dollars a month. If you do, you’ll regret it at claim time.