INDIVIDUAL DISABILITY INCOME INSURANCE
What to Look for in a Disability Policy
● Definition of disability: Are education, experience, and past earnings taken into account in determining whether the insured is qualified to resume work? Many policies provide for an initial “own occupation” definition of disability, for a specified period of time, after which a different definition of disability applies.
● Partial or residual benefits: Partial or residual disability benefits may be paid in some policies when the impairment allows the insured to perform only a portion of his or her duties. This provision may also pay benefits in the event the disability reduces the insured’s income by a certain amount (e.g. 20% or more) from pre-disability levels.
● Cost of living adjustment: Is there a cost of living adjustment (COLA) which would increase benefit payments after a disability occurs?
● Cancel-ability and renew-ability of policy: Except for nonpayment of premiums, is the policy non-cancel-able or guaranteed renewable? Non-cancel-able generally means the insurer cannot cancel the policy, change the policy provisions or increase policy premiums after issue, as long as premiums are paid on a timely basis. Guaranteed renewable is similar, but allows the insurance company to increase the premium.
● Waiting and elimination period: Is the waiting or “elimination” period proper for the insured’s circumstances? Commonly available periods may include 30, 60, 90, 180 and 360 days. Naturally, the longer the elimination period one selects, the lower his or her premium payments will be. However, a person’s needs, cash reserves and income sources should be the deciding factors in selecting a proper elimination/waiting period.
● Benefit period: What benefit period should be selected? Since a long-term medical disability can be financially devastating, one should elect a long-term benefit where possible. Some companies offer lifetime benefit periods, but periods as short as 24 months to 60 months are also available.
Types of Disability Contracts
Several other specialized disability contracts are available to the businessperson
● Business overhead expense: Covers expenses such as staff salaries, rent, telephone, utilities, malpractice insurance, and other expenses necessary to keep a business open.
● Key person disability: Reimburses the business for the loss of a key employee and allows funding of temporary replacement or training of a successor.
● Disability buyout: Provides income to fund a buy-sell agreement triggered by the total disability of a shareholder/business owner. Payouts may come in the form of a lump sum, monthly installments, or a combination of the two.
Caution: Highly-compensated employees should be aware of payment caps in many group long-term disability policies. While some programs will provide disability income payments at 60% or 66% of salary, many have a relatively low dollar limitation, such as $3,000 per month.
Odds of Disability
Insurance claims studies indicate that the odds of becoming disabled for 90 days or longer are much greater than dying during one’s working years. Studies also suggest that, as the number of business owners or key employees increases, so do the odds that one of them will suffer a long-term disability.
Probability of at Least One Long-Term Disability Prior to Age 65
Note: Based on the 1985 Commissioners Individual Disability Table, most recent available.
Determining Odds of Disability Among People of Different Ages
Use the following table and worksheet to determine the risk of a long-term disability among your business owners or key employees.
Step 1: For each owner or key employee you wish to include in your analysis, choose the value from the table above that corresponds to the age closest to the actual age of the owner or key employee, and include the value in the space below.
Step 2: Multiply all of the values by each other to arrive at a single value.
_______ x _______ x _______ x _______ x _______ = _______
Step 3: Multiply the single value by 100 to convert it to a percent.
100 x _______ = _______ %
Step 4: Subtract the single value from 100% to determine the odds of long-term disability for any one of the groups of owners or key employees in your company.
100 - _______ = _______ %
Note: You can perform this analysis for any number of owners or key employees, not just the five shown in this worksheet.
Seek Professional Guidance
Insurance agents and brokers, insurance counselors, and other trained financial consultants can help provide answers to detailed questions about a particular policy. These professionals are also helpful in selecting the right policy and the appropriate amount of coverage