Quick Facts About Disability Insurance
§The sole purpose of individual disability insurance is to
replace your after-tax income in the event of an accident or
illness. These policies do not provide protection from medical
expenses or recovery of damages for “pain and suffering”.
§Since the benefit payments are designed to be income tax-free,
insurance coverage in the amount of 2/3 of your salary is
roughly equivalent replacing your net take-home pay. This is
usually the maximum amount of insurance that you can purchase.
§Be prepared to show the insurance company a pay-stub is you are
salaried or an income tax return if you are self-employed to
prove the amount of insurable income.
§If you are self-employed, you can only insure the amount of net
income that you reported on your tax return, even though your
actual earnings might be much higher. In this case, you might
want to supplement your insurance with “business overhead
coverage” that does not depend on net income.
§Expect the insurance policy to exclude or limit coverage for
pre-existing conditions. If you have a bad knee, for example,
expect that your policy might have a 5 year rider on claims due
to knee injuries.
§Most policies are issued for a term of five years of coverage,
although you can buy a longer or shorter benefit amount.
§Most policies have a 90 day waiting period before you can begin
collecting a benefit, but you can buy longer or shorter waiting
periods.
§Most policies integrate with Social Security disability
insurance. This means that the total amount of the benefit you
collect will not exceed your net after-tax income before you
were disabled.
§Most policies may be continued year after year until you
retire. But the average life of a disability insurance policy is
about 5 years.
§The average time required for an insurer to review an
application is about 3 weeks. The insurer may request copies of
medical and financial records.
§Applications are still submitted on paper; no online enrollment
system is available.
§Expect the premium cost to be about 2% of your salary if you
have a “desk job” and about 4% of your salary if you work with
your hands. Of course, this is a very rough guideline, and the
actual cost will depend on a greater number of individual
factors.
§When a policy is issued, you have at least 10 days to review
all of the details and cancel the coverage if you are not
completely satisfied. It may be useful to have an independent
financial adviser review the new policy during this period.
§Assuming that you keep disability insurance for the balance of
your working career, the probability of suffering a loss of
income due to accident or illness sufficient to trigger a claim
under your policy is about 1 in 4.
§If you become disabled, you should consult with an attorney who
specialized in disability insurance claims before filing a claim
with the insurer. This may help avoid delays and disputes
regarding the claim.
About the author:
Tony Novak, MBA, MT, is a financial adviser based in Narberth,
Pennsylvania. He is editor/publisher of “Tax and Benefit News”
and moderator of the tax forum for financial planners at
“Financial Planning Interactive”. He is available by telephone
at 1-877-529-7435 to address public inquiries on tax and benefit
planning issues free of charge through OnlineAdviser service
sponsored by www.MedSave.com and www.FreedomBenefits.com.
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