The Center For Debt Management
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Guide To
Disability Income Insurance

What Is Disability Insurance?
Are You Covered By Group Disability Benefits?
What About Social Security Disability Benefits?
Are You Eligible For Other Disability Income?
How Much Disability Income Will You Need?
What to Look For in a Policy
What Else Do You Need To Know?
Is Business Protection Available?
And Remember...
A Final Word


Could you continue to pay your bills if you were unable to work for any length of time because of illness or injury? If you were to become disabled, do you know how much money would be coming in each month and from what sources?

Some people can rely on disability benefits from their employers and/or the government. But, for a great many people, income stops when work stops. Individual disability income insurance is designed to replace income when illness or injury stands in the way of earning a living.

This booklet explains the various sources of disability income, what disability income insurance is, and what it covers. It includes a worksheet you can use to evaluate personal sources of disability income, as well as a checklist of policy features you can use to compare disability income insurance policies. With this information, you?ll be able to makean informed decision about whether you need individual disability incomeinsurance and, if so, what features are most important to you.

What Is Disability Income Insurance?

Disability income insurance provides you with income should you become sick or injured and unable to work. It helps protect against family financial catastrophe by giving you an income to meet daily expenses.

Disability income insurance comes in two major forms.

A variety of employer-paid and government sponsored programs, generallycost-free to the recipient, covering certain categories of workers.

Private policies (paid for by individuals) that protect income whenthere are no applicable employer or government programs or when those programsdo not adequately meet income needs.

As with all insurance, disability income insurance operates on the principle that many people pool small sums of money to benefit those who need help.The beneficiaries are people who need adequate income should they become disabled.

How do you find out if you have enough protection? Where do you start?

Are You Covered By
Group Disability Benefits?

First, find out exactly what benefits your employer offers in the event of a disabling illness or injury. Most employers allow some short-term sick leave, which may last from a few days to as much as six months, depending both on employer policy and on duration of employment. In some states (for example, Hawaii, New Jersey, New York, and Rhode Island), state law requires most employers to provide disability benefits for up to 26 weeks. In California, most employers must provide coverage for up to 52 weeks.

No laws require employers to offer long-term disability (LTD) insurance but it is estimated that almost half of mid-size to large employers provide long-term benefits for at least five years. Typical group long-term disability benefits replace about 60 percent of salary, start when short-term benefits are exhausted, and continue anywhere from five years to life. Often, group long-term insurance is fully paid for by employers without contributions by employees. (That?s why employer-paid disability income benefits are subject to income tax.)

Check with your employer?s benefits office to see if you are covered and, if so, what is available to you. Find out how long you must wait before benefits begin and how long payments will continue during your disability. Find out, too, whether your employer?s plan takes other disability coverage (such as government programs) into account when calculating your long-term disability pay. Ask for a booklet describing the disability coverage your company offers.

What About Social Security
Disability Benefits?

Most salaried workers in the United States participate in the federal government?s Social Security program. Social Security is best known forits retirement benefits. But the Social Security Administration (SSA) also administers disability benefits. In March of 1999, 4.2 billion dollars in Social Security disability payments were sent to 7.2 million Americans.

Your salary and the number of years you have been covered under Social Security determine how much you can receive. In March of 1999, the average monthly payment for a disabled worker was $733.

Here are some important points to remember:

Eligibility is based on being unable to perform any gainful employment, not just the job you were performing at the time the disability began.

You are eligible for benefits after you have been disabled for 5 months and if the disability is expected to last 12 months or to result in death. Claim processing may take up to 3 months, so file as soon as possible.

Social Security payments may be reduced by disability entitlements under other government programs. Why? Because total combined payments under Social Security, workers? compensation, civil service, and military programs generally cannot exceed 80 percent of average predisability earnings. A government pension also may reduce Social Security disability payments.

After 24 months of benefits, recipients qualify for Medicare. If you want the medical insurance portion of Medicare, in addition to hospital coverage, you must enroll and pay a monthly premium.

Social Security disability payments are subject to federal income tax if your "combined income" adjusted gross income plus any nontaxable interest income and half of your Social Security benefits exceeds certain limits. If you file an individual tax return, you may have to pay income tax on 50 percent of your Social Security disability payments if your combined income is between $25,000 and $34,000. If your combined income is greater than $34,000, then 85 percent of your benefit payments are subject to income tax. If you file a joint tax return, and your combined income is between $32,000 and $44,000, then you may have to pay taxes on 50 percent of yourSocial Security disability benefits. If your combined income exceeds $44,000, then 85 percent of your bene fit payments are subject to income tax.

Social Security disability payments can be an important part of your income should you suffer a disabling illness or injury. Contact your local Social Security Administration office for an estimate of the disability benefits to which you would be entitled.

Are You Eligible For Other Disability Income?

There are many other potential sources of income if you become disabled:

  • Workers compensation benefits, if you suffer an accident at work or an illness that results from your employment.

  • Veterans Administration pension disability benefits,
    for eligible veterans.

  • Civil service disability pay, for federal
    or state government workers.

  • Black lung program for miners.

  • State vocational rehabilitation programs.

  • Group union disability coverage.

  • Automobile insurance, if disability results from an auto accident.

  • Private insurance, such as credit disability insurance, that makes monthly loan payments when you are disabled.

  • Supplemental Security Income (SSI) for persons
    with low incomes and limited assets.

  • Medicaid, also for persons with low incomes and limited assets.

The availability and extent of these and other programs vary widely. But, because one or more may be an important source of income should you become disabled, it?s important to determine whether you are eligible. If you are, you should also find out how long benefits will be paid. And, of course, your own resources the savings you?ve put aside over the years are another valuable source of income.

How Much Disability Income Will You Need?

Add up all the benefits you are entitled to under the public and private programs mentioned, along with the monthly income you could count on from other sources such as your savings. If the total approaches your required income after taxes, you can assume that, should total disability strike, you would be able to pay your day-to-day bills while recuperating. You must remember that eligibility for Social Security disability benefits is contingent upon your disability being expected to last for at least 12 months or lead to your death. If the total from employer benefits, Social Security, and other programs along with your own resources will not be close to your pre-disability, after-tax income and will not be adequate to support your family, you will want to consider buying additional disability income insurance to make up the difference.

The amount of long-term disability benefits you may receive through your employer?s group plan or your personal insurance benefits may be reduced by the amount of Social Security or other government benefits that maybe paid.

A special note for employers:

If you are your own employer, consider a group policy for you and your employees. If you are a sole practitioner, or if you work for a business that does not provide benefits under a group policy, an individual policy is a good idea. After all, if you do not receive benefits, your entire business may suffer.

An agent can be helpful:

Whether you are an employee or an employer, your insurance agent can help analyze your sources of disability income, determine waiting periods for various benefits, and determine whether additional coverage would be wise.

What to Look For in a Policy

If you find that you need an individual disability income policy over and above any other income protection you may have, here?s what you need to know:

Definition of Disability

Policies vary. Some pay benefits if you are unable to perform the duties of your customary occupation, others only if you can engage in no gainful employment at all. Be sure to ask your insurance agent how various policies define disability.

Extent of Disability

Some older policies require that you be totally disabled before payments begin. Partial disability sometimes is covered for a limited time but most often only if the partial disability follows a period of total disability for the same cause. Some policies may not require total disability before partial disability payment.

"Residual" Benefits

If you are able to work but your income is reduced because you cannot fulfill all of your job responsibilities, residual benefits can help to make up the difference in your income. A standard feature insome policies (added with a rider to others), a residual benefit allows partial payment based on your loss of income generally without prior total disability.

Presumptive disability

Even if you can still perform some or all of your regular job, you are presumed fully disabled and are entitled to full benefits under specified conditions, such as loss of sight, speech, hearing, or use of limbs.

Size of benefits

Monthly benefits are calculated in terms of stable, earned income at the time of purchase. Most insurers, not wanting to provide benefits so sizable that they would encourage workers to remain at home, limit benefits from all sources to no more than 70 to 80 percent of monthly income. Lower-paid workers can expect to receive more of their predisability incomes while higher-paid workers generally receive less.

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