ASK THE EXPERT: DISABILITY INSURANCE
What would happen if your paycheck suddenly stopped because you were ill or injured and couldn't work? Could you still pay your mortgage or rent and monthly bills? You could if you had long-term disability insurance. Disability insurance provides...
What would happen if your paycheck suddenly stopped because you were ill or injured and couldn't work? Could you still pay your mortgage or rent and monthly bills? You could if you had long-term disability insurance. Disability insurance provides monthly income when you're disabled and unable to work. Without coverage, a disability can deplete your savings or drive you into serious debt.
You may already have some disability coverage through your employer, but it may not be enough. Benefits provided by employers typically cover only 50 percent of your income up to a certain monthly maximum (which may be less than 50 percent for highly compensated employees). And because benefits from group plans generally are taxable, there's less money available for paying your bills.
Social Security disability replaces only a limited portion of your salary, and it's very difficult to qualify. Generally speaking, you must have been disabled for at least five months, with a disability that is expected to last at least 12 months or end in death. Additionally, you must be unable to be gainfully employed in any occupation, not just the occupation you worked in at the time your disability began.
To select the best policy for you, you'll need to consider the following scenarios.
* The most important consideration is how your policy defines disability. The best policies pay benefits if you are unable to perform the major duties of your own occupation, even if you can do some other tasks. Other policies pay only if you cannot perform the duties of any occupation for which you are reasonable qualified by training, experience, or education.
* All long-term disability plans have an elimination period before benefits are paid. An elimination period is similar to the deductible for medical and car insurance. The most common waiting period is 90 days, but you can select a policy that doesn't pay until you've been disabled for 180, 365 or 730 days. The longer the elimination period, the lower the premium.
* With most policies, you can select to receive benefits for a specified period of time such as two years, five years, or until retirement age. The shorter the benefit period, the less expensive the policy. If you can afford it, it's best to purchase a policy that provides benefits until retirement age.
* To determine the percentage of income you want to replace, compute how much you would need each month to cover your monthly expenses. Keep in mind that while some work-related expenses may be lower, you could be paying more for medical expenses. On the plus side, benefits from a personal disability policy generally are tax-free.
* The key difference between these two policy types is that under a noncancelable contract, once you have been approved, the company cannot cancel your policy or raise your premiums. With a guaranteed renewable policy, your policy cannot be canceled as long as you pay the premiums, but the insurer can raise your premiums as long as the change affects an entire class of policyholders and doesn't single you out. While the price for a noncancelable policy is higher, it's the best option as it locks in your rates and benefits. A CPA can help you make the right choice.
Money Management is a series provided by the Minnesota Society of Certified Public Accountants. For personal and small business information, go to www.mncpa.org or call (800) 331-4288.