When it comes to financial planning, risk management – particularly insurance issues – are one of the most confusing areas that people address. What would be the financial impact on your family if there were a loss of income due to a physical or mental disability?
Planning around the possibility of a disability is important considering the following statistics from the Journal of the American Society of Chartered Life Underwriters:
- People age 35 or younger have a 50% chance of becoming disabled for at least 90 days prior to reaching age 65
- People between the ages of 40 to 50 have a 40% chance of being disabled prior to turning 65
- 60% of those who become disabled between the ages of 35 to 55 remained disabled after 5 years
- 70% of all disability applicants are rejected for Social Security disability benefits (Source: Social Security Handbook)
We generally recommend clients take a two-tiered approach to protecting against an unexpected loss of income.
- Establish an emergency fund that is adequate to cover approximately 6 months of your household expenses in the event of a temporary loss of your income (through a job loss or short-term disability).
- Obtain a disability income insurance policy to cover a sustained loss of income exceeding 6 months.
As with most insurance products, there are many types of disability insurance policies. However, from the most basic standpoint, disability insurance can best be categorized into two types of policies based on their definition of disability.
Own (or Your) Occupation policies will generally cover a disability if you cannot perform the job duties of your specific occupation. “Own Occ” policies, as they are commonly referred, are the most comprehensive and expensive form disability income insurance. If an insured cannot perform the exact job held before becoming disabled, they would receive a benefit under the terms of an own occupation policy.
Any Gainful Occupation policies will pay a benefit only if you cannot find another job for which you are qualified based on your education and experience level. Often times policies whereby the definition of disability is any gainful occupation, will specify a certain minimum income level you should be able to earn (i.e. 60% of your pre-disability earnings).
Any Occupation policies will only pay a benefit if your disability prevents you from performing any job. This type of disability policy is so limiting in its definition of disability that benefits are rarely paid (the Social Security Administration uses this definition of disability when granting disability benefits).
Selecting a Disability Income Policy
Check with your employer or professional organization that you are a member to see if you are eligible for group disability coverage. Group policies are usually cheaper than individual policies. Unfortunately, with most group policies your coverage may cease if you change jobs or drop out of the professional organization offering the coverage.
It may be most appropriate to seek coverage through a highly rated insurance company. Since disability income insurance can be somewhat costly, here are a few of the key features of disability insurance that can be adjusted to meet your specific needs:
Benefit Amount – this is the monthly benefit your policy would pay if you were to become disabled. Most policies will replace no more than 70% of your earned income prior to the disability.
Benefit Period – this is the amount of time your policy would pay a benefit in the event of a disability. Common benefit periods are 2 years, 5 years or to age 65.
Elimination Period – this is the amount of time that you would need to be disabled prior to receiving any benefit from your policy. Longer elimination periods result in less expensive policies. We generally recommend an elimination period of at least 90 days.
Cost of Living Adjustment (COLA) – this is a rider that allows your benefit amount to be adjusted periodically for inflation.
If you have any questions, or would like to discuss disability income planning in the context of your specific financial plan, please contact Beacon Financial Strategies today.