The Center For Debt Management
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Guide To
Disability Income Insurance

... Continued From Previous Page

When the payments begin

Today?s policies allow you to decide when benefit payments begin. You can choose a waiting period at the time of application; these range anywhere from the 31st day to six months or more after the onset of the disability. Depending on how much money you have saved, and your other resources, you can reduce your premiums by electing to wait 60 days, 90 days, or even six months before you start to receive benefit payments. Remember, though, that the first check is usually not paid until 30 days after the waiting period.

Length of coverage

By choosing a benefit term, you will elect benefits that are payable for one year, two years, five years, to age 65, or for a lifetime. Since disability benefits are designed to replace the income you would otherwise earn by working, most people do not need benefits extending beyond the working years. Electing shorter benefit periods can save premium dollars, but bear in mind that if you need this insurance at all, you probably need it most to cover a disability that permanently removes you from the workforce. A lengthy disability threatens your financial security much more than a short-term disability.

Keeping pace with inflation

For an additional premium, you can add a cost-of-living adjustment (COLA) to basic disability income coverage. This provision increases benefit payouts by a specified percentage, generally 4 to 10 percent, after each year of disability and can be important particularly during a lengthy period of total disability. While this is a relatively expensive option, it could be vital to maintaining your standard of living.

Most policies include a waiver of premium provision, so that you don?t have to pay any more premiums after you?re disabled for 90 days. Some policies offer the opportunity to buy additional disability coverage to keep pace with a rising income, without having to pass a medical examination or to submit further medical evidence of insurability.

What Else Do You Need To Know?

Selecting the level and duration of benefits is only the first step. To be sure that coverage will continue, you should ask about renewability. Most disability income insurance comes with one of two types of renewability provisions: Non-cancelable policies give you the right to continue a policy by timely payment of premiums, and the insurance company cannot change the premiums and benefits shown in the policy. Guaranteed renewable policies will be automatically renewed, with the same benefits, but the premium may be increased if it is changed for an entire class of policyholders.

While most individually purchased disability income policies are either non-cancelable or guaranteed renewable, other kinds do exist. Conditionally renewable policies can be declined by class, geographic area or for reasons stated in the policy other than deterioration of health. Optionally renewable or conditionally renewable policies are extended at each anniversary or premium due date if the insurance company decides to do so. (Some policies are renewable to age 75 if you are still employed full-time.)

In general, if you pay the premiums for an individual disability policy, payments you receive under the policy are not subject to income tax. If your employer had paid some or all of the premiums, some or all of the benefits may be taxable.

When you buy, consider a policy that pays disability benefits for both accident and illness. Some policies pay only for accidents, but you want to be insured for illness too. In fact, as you get older, it is more likely that you will need to be covered for an illness than for an injury.

Is Business Protection Available?

Income replacement insurance is particularly important if you own a small business. In addition to standard disability policies, some policies have such special features as:

  • Recovery benefits that pay after you return to work full-time, during the period in which you are reestablishing a customer or client base.

  • Overhead expense coverage that pays for certain office expenses.

  • For jointly owned businesses, a disability buy-out policy disburses funds for one partner, or the business entity, to buy a disabled partner?s share of the business.

  • Key-person insurance, which protects a firm against the loss of income resulting from the disability of a key employee.

And Remember...

. . . A well-trained benefits consultant, financial counselor, or insurance agent can help. Ask about the following:

  • What is an adequate level of benefits, in relation to your present and future obligations?

  • How long of a waiting period should you select to fit your circumstances until benefits begin?

  • How long do you want to receive disability income should it become necessary?

  • What related benefits, such as partial or residual disability,
    are available?

  • Is the policy noncancelable, guaranteed renewable, or conditionally renewable?

  • How much coverage are you eligible for at your present salary?

Policy Checklist

Take into consideration that every policy may have different features. The following checklist will help you compare policies you may be considering:

 1.  How is disability defined? inability to perform your own job? inability to perform any job?

 2. Does the policy cover accidents? illness?

 3.  Are benefits available for total disability? for partial disability? for residual disability? only after total disability?

 4.  Are full benefits paid, whether or not you are able to work for loss of sight? speech? hearing? use of limbs?

 5.  The maximum benefit will replace what percentage of income:

 6.  Is the policy non-cancelable, guaranteed renewable, or conditionally renewable?

 7.  How long must I be disabled before premiums are waived?

 8.  Is there an option to buy additional coverage, without evidence of medical insurability, at a later date?

 9.  Does the policy offer an inflation adjustment feature: If so: what is the rate of inflation? is there a maximum?

A Final Word

Insurance policies are legal contracts. Read and compare the policies you are considering before you buy one, and make sure you understand all of the provisions. Marketing or sales literature is no substitute for the actual policy. Read the policy itself before you buy.

Ask for the insurance company?s ratings. The A.M. Best Company, Standard& Poor?s Corporation, and Moody?s all rate insurance companies after analyzing their financial records.

Ask for a summary of each policy?s benefits for an outline of coverage. Good agents and good insurance companies want you to know what you are buying.

Don?t be afraid to ask your insurance agent to explain anything that is unclear. If you are not satisfied with an agent?s answers, ask for someone to contact in the company itself.

And bear in mind: Even after you buy a policy, if you find that it doesn?t meet your needs, you generally have 10 to 30 days (this varies by company and state) to return the policy and get your money back.

Finally, you should know that every state has a department of insurance that regulates insurers and assists consumers. If you need more information, or if you want to register a complaint, check the government listings in your local phone book for your state?s department of insurance.

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