Disability Insurance Guide: Prevention & Planning for the Unexpected

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Richard Reich

In my 25+ years as an independent life and disability insurance broker, I have personally assisted thousands of clients with their life and disability insurance needs.

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Do I Need Disability Insurance?

According to a recent Social Security fact sheets, “just over 1 in 4 of today’s 20 year-olds will become disabled before the age of 67.” That’s a sobering statistic, considering that disability is often the furthest thing on a young person’s mind.

A disability is an injury, illness, or affliction that prevents someone from performing occupational duties. Because most young people associate risk of disability with old age or physically-demanding occupations, the likelihood that they’d invest in disability insurance is slim. A common misconception is “I’m young. I’m healthy. Nothing could happen to me.” But life is unpredictable: car accidents, genetics, and other debilitating factors are beyond our control.

Disability insurance provides a monetary cushion and prevents the disabled individual from suffering from the negative effects of financial hardships. For families that rely on two incomes (very common in today’s culture)—the loss of a paycheck due to injury or illness may be devastating.

All work environments pose a threat, and a workforce that is increasingly moving into the technology field—and its accompanying office environment—might even exacerbate the situation: young workers further deny their need for disability insurance because of the apparent lack of danger their work environment poses. However, carpal tunnel, a painful affliction that occurs after prolonged, repetitive movements, is just as debilitating to a computer programmer as a back injury is to a construction worker. Even at its mildest, physicians recommend three to six months of treatment, which, if unpaid, is a significant loss of income.

Purchasing disability insurance is a wise decision for anyone for everyone to consider, regardless of occupation.

What you should know about disability insurance:

• What is disability insurance? In the most basic terms, disability insurance is protection for your income.
• Who needs disability insurance? If you depend on earned income to pay your bills, disability insurance is something that you can’t afford to be without.
• What is the likelihood of needing disability benefits? The U.S. Social Security Administration reports that the odds of a 20-year-old worker becoming disabled prior to retirement are three out of ten (SSA Publication No. 05-10029).
• How does disability insurance differ from life insurance? While life insurance is an important part of providing long-term financial protection for your loved ones, it pays benefits only following death. Stop and ask yourself what will happen to your family if you lose the ability to work. People often live with disabilities for decades. That’s why disability insurance is so important.

Some Quick Facts

According to the 2016 Disability Statistics Annual Report published by the Institute on Disability at the University of New Hampshire:

• The percentage of people with disabilities in the US population rose from 11.9% in 2010 to 12.6% in 2013, 2014, and 2015.
• Rates of disability increase with age. In the US in 2015, less than 1.0% of the under 5 years old population had a disability. For those ages 5-17, the rate was 5.4%. For ages 18-64, the rate was 10.5%. For people ages 65 and older, 35.4% had a disability.
• In 2015, of the US population with disabilities, over half (51.1%) were people in the working ages of 18-64, while 41.2% were 65 and older. Disability in children and youth accounted for only 7.2% (ages 5-17) and 0.4% (under 5 years old).
• For most families, the mortgage payment is their single largest expense. Without a source of income following a disability, making that payment often becomes impossible.
• By the time Social Security disability payments are approved (if ever), foreclosure proceedings could already be in process.
• According to the National Safety Council (2004), home loan foreclosures are 16 times more likely to result from a disability than from death.
• Per a 1998 study conducted by the U.S. Housing and Home Finance Agency, nearly half of all foreclosures are the result of a disability.
• The best way to protect your ability to continue to pay your mortgage following a disability is to find room for long term disability insurance premiums in your budget today. Doing so will be much easier than finding a way to pay your mortgage if you lose your ability to earn an income.

These alarming statistics alone should be reason enough for all breadwinners to sufficiently protect their ability to earn. With disability insurance, you can replace up to 60% of your regular income if, due to illness or injury, you’re unable to work.

Causes of Disability

Accidents and long-term illnesses can occur to anyone at anytime, resulting in a devastating disability. Common illnesses, including diabetes, cancer, and heart attacks make up the majority of long-term disabilities. Other significant causes include injuries, back pain, and arthritis. Many causes of disabilities are not work-related and therefore, are not covered by workers’ compensation. Various lifestyle choices can lead to these injuries and illnesses, such as obesity and other contributing factors.

• Common Causes of Disability: Learn about the most prevalence and common causes of disability among adults.
• Disability Causes: Introduction, causes, treatment, diagnosis and symptoms of disability.
• Treatable Causes of Disability: Information about major depression and other types of treatable causes of disability.
• Disabilities and Arthritis: List of common causes of disabilities and data on arthritis in adults.
• Brief Introduction to Disabilities: Find causes of disabilities, including visual, hearing, physical, and cognitive impairments.

Prevention

Although not all illnesses and accidents that cause disabilities can be prevented, some can be eliminated or controlled when certain factors are present. With the early detection of certain illnesses, such as heart disease or cancer, certain treatments can be used to prevent future or related conditions. Injuries, illnesses, and potential conditions require a professional health assessment when symptoms occur. Routine visits to your doctor for emotional or physical issues are the first step to the prevention of disabilities.

• Intervention for Prevention of Disability: Learn about the importance of early recognition for prevention of disabilities.
• Prevention of Work Related Disabilities: Clinical trial for prevention of work-related disabilities and lower back pain.
• Helping People Stay Employed: Information on how to prevent needless work disabilities.
• Principals in the Primary Care Office: Article about disability prevention principals from the American Family Physician (AAFP).
• Avoiding Work-Related Disabilities: The orthopedic article presents information on how to avoid work-related disabilities and workers’ compensation.

Planning

Disabilities are never expected, but it’s important and smart to plan ahead for potential accidents or illnesses that could occur. Many people plan for these types of events by saving money or obtaining insurance. A disability can come in many forms whether it is a small injury or long-term illness. During this difficult phase in your life, it’s essential that you’re financially-secure and prepared to deal with this event for the benefit of yourself and your family.

• Equal Opportunities: Learn about the European Action Plan that provides equal rights to people with disabilities.
• The Centre for Civil Society: Here you will find planning information and circles of support for people and families with disabilities.
• Planned Lifetime Advocacy Network: PLAN is a non-profit organization that helps families with disabilities with future planning.
• Mamre Association: The Mamre Association supports families who have a family member with a disability.

Some people are born with disabilities while other acquires them through work-related accidents or lifestyle illnesses. With the proper knowledge, prevention, and planning information, those with disabilities and their family can control this life-changing event.

Long-Term Disability vs. Short-Term Disability Insurance

As you begin searching for a policy, you’ll run across long-term disability insurance and short-term disability insurance. A short-term policy can supply you with up to 60% of your normal income for a few months or up to a year. This type of policy might come in handy if you’re suffering from a temporary illness or injury. However, most short-term policies are issued for large employer groups.

A long-term disability insurance policy, on the other hand, can replace up to 60% of your income until age 65 or 67. For this reason,  the premiums for these types of policies are generally more expensive than short-term disability insurance policies. Is the peace of mind of knowing that you will still be able to earn a living if you become terminally ill or permanently disabled worth the cost? We think so.

What about Social Security Disability?

Yes, if you are eligible, you can collect Social Security (SSDI) benefits if you are disabled and unable to work. But, and this is important, you must be unable to perform any work – not what you normally do, but anything you can do.

For readers who may be new to the subject of long-term disability, own-occupation is not the same as any occupation. This means if you are a surgeon who has become disabled, your government is unlikely to help you if you can still teach surgery rather than perform surgery.

There is also that little problem about getting your case reviewed and then approved. According to NOLO,  a well-known legal research organization, less than half of all SSDI cases are approved on the first submission. This means that you can apply for your benefit, wait three months to get an answer, and 50% of the time, that answer will be “Denied.” Time to find an SSDI attorney!

Get Familiar with Chapter 7

For workers without any type of disability income insurance, the process after they become disabled is sadly familiar.

1. File your claim with the Social Security Administration and wait about 90 days for approval.
2. Use whatever savings you have for monthly living expenses.
3. You receive your denial notice from Social Security and start looking for a lawyer
4. Your attorney re-files your disability claim with SSDI.
5. Max out all credit cards once your savings are gone.
6. Cut off cable TV and internet and sell your boat or one of the family vehicles
7. Your claim is finally paid retroactively and the lawyer get’s their share.
8. File Chapter 7 bankruptcy and start over

It doesn’t always happen this way, there are many people who can get through the financial devastation that can result from a long-term disability, especially if a spouse is working. Unfortunately such is not often the case. In fact, a study done at Harvard University indicates that 62% of personal bankruptcies are the result of medical expenses and 78% of those cases had health insurance. Health insurance will not replace your income.

Own-Occupation Disability Insurance Vs. Any-Occupation Disability Insurance

Another choice that you’ll have to make is between own-occupation disability insurance and any-occupation disability insurance. Own-occupation disability insurance protects your ability to earn a living if, due to illness or injury, you are unable to perform the usual and customary duties of your own occupation. If you’re a physician or dentist, a minor injury could put your once-promising career on hold indefinitely.

With own-occupation disability insurance, you can expect to replace up to 60% of your current income (tax-free in most cases), even if you’re still healthy enough to work another, lower-paying job. This is not true of any-occupation disability insurance. With this type of policy, you will only receive benefits if you are too sick or injured to work in any occupation.

For example, a surgeon may not be considered disabled under an any-occupation disability policy if he or she is still able to teach medicine rather than performing life-saving surgery on patients.

Understanding Own Occupation Disability

The manner in which disability is defined is one of the most important components in any long term disability insurance policy. If you want to make sure that you are fully protected, it’s important to look for a disability insurance policy that specifies the definition of disability in terms of your “own occupation.”

Many times, the lowest disability insurance premiums are for policies that do not define disability in this manner. Rather, they specify that benefits will be paid in the event you become unable to work in “any gainful occupation.” With this type of policy, you’d have to experience a disability so debilitating that you’d be rendered unable to hold any type of job at all. These types of policies are less expensive than ones that provide “own occupation” coverage because the “own occupation” policies are more likely to pay the claim in more circumstances.

If you’ve spent years training to pursue a particular occupation, there’s a good chance that you aren’t likely to experience the same level of personal and financial success if you find yourself having to change fields due to a disability. The best way to protect yourself, and your family, is with quality long term disability coverage that provides benefits if you lose the ability to work in your chosen occupation.

Individual Versus Group Disability Insurance

Are you wondering if you should opt for an individual long term disability policy rather than going with the group disability coverage available through your place of employment? Many people decide to go with a group plan without investigating other options available to them. Each situation is unique, but there are many circumstances under which individual disability coverage is better than a group plan, in terms of both costs and benefits.

Disability Benefits and Taxes

Are you wondering if benefits paid to you as disability benefits are taxable? If you’ve heard conflicting stories about disability insurance and taxes, that’s because in some cases disability benefits are taxable, and in other cases they are not. When comparing different disability insurance options, benefit taxation can be an important factor in evaluating disability insurance cost.

When are disability insurance benefits taxable?

Benefits paid to a disabled individual through an employer paid group disability insurance plan are taxable as ordinary income. This means that you’ll owe income taxes on disability benefits you receive via group disability insurance at the same rate you would have to pay if you earned the money as wages or salary.

When are disability benefits not taxable?

Disability insurance benefits paid to insured individuals through an individual disability insurance plan that you pay yourself (after tax not through your employer) are not subject to income tax. When you receive disability benefits under an individual disability policy, you’ll be able to utilize all the funds you receive toward covering your daily living expenses rather than having to set aside a portion for income taxes.

Factors That Affect Disability Insurance Premiums

Wondering how much you’ll have to pay for a long term disability insurance premiums? Because several different factors impact the cost of disability insurance, the best way to find out what your premiums will be is to request disability insurance quotes online. That way, you’ll be able to compare what several different insurers have to offer, so you can make the best policy selection for your particular situation.

Variables That Impact Disability Insurance Cost Include:

• Age

• Occupation
• Employment status (self-employed versus employee)
• Health history
• Earned income
• Smoking status

Social Security Disability is not the Answer

Many workers in America today are under the assumption that if they become disabled, they can receive Social Security Disability benefits and continue with their lifestyle. Not true!

In many states, it can take a year or longer to get a Social Security Disability claim approved, and only about 35 percent of the claims filed are actually approved.

In order be considered totally disabled for social security purposes, you must meet three criteria:

1. The individual is unable to perform the work required by his or her previous occupation.
2. The disabled person cannot perform a different type of work as a result of his or her medical condition.
3. The person’s disability is expected to either a) last for a year or more or b) result in death.

Even if you are approved for benefits, there’s a good chance that the amount of money you receive won’t be sufficient to take care of your ongoing living expenses. The average social security benefit is less than 750 per month. Since it’s likely that you’ll need more money to support yourself and your family in the event you become disabled, it’s certainly wise to invest in your own individual disability insurance.

Consider Portability

When your only disability insurance policy is an employer-sponsored plan, you can find yourself without this important form of income protection if you quit or lose your job. Individual disability policies are not tied to your place of employment, which means that you can keep coverage in place regardless of job changes.

Disability and Foreclosure Statistics:

• For most families, the mortgage payment is their single largest expense. Without a source of income following a disability, making that payment often becomes impossible.
• By the time Social Security disability payments are approved (if ever), foreclosure proceedings could already be in process.
• According to the National Safety Council (2004), home loan foreclosures are 16 times more likely to result from a disability than from death.
• Per a 1998 study conducted by the U.S. Housing and Home Finance Agency, nearly half of all foreclosures are the result of a disability.
• The best way to protect your ability to continue to pay your mortgage following a disability is to find room for long term disability insurance premiums in your budget today. Doing so will be much easier than finding a way to pay your mortgage if you lose your ability to earn an income.

Disability Insurance Comparisons

What Disability Insurances Should I Get?

There are three types of disability insurance plans: group, individual, and supplemental disability plans.

Group plans are the most common types of disability insurance, often covered by an employer. They are also commonly the most affordable—the lowest tier being very affordable. While this is a definite benefit, group plans rarely will be able to cover the cost of an entire paycheck. Learn more about why individual disability insurance coverage is a good idea.

If the group plan offered by your place of employment is unsatisfactory, an individual plan might be more appropriate. These plans are customizable and will fit with any unique circumstance, but they will often be more expensive as a result.

Supplemental disability insurance is an affordable option for those who want to bridge the gap from a partially-covered group plan to the comparable benefits of an individual plan.

Because everyone’s situation is unique, there is no blanket solution for everyone. When considering disability insurance, it is important to review all of your options, and compare plan benefits and rates before making a decision. A qualified insurance broker can also help you make the decision that is best for you and your family. At LifeInsure.com, we allow you to instantly obtain disability quotes. Use our disability quote tool now, to get started on getting the coverage you need.

Group versus Individual

The manner in which the policies are available are based on occupation and how much you receive in income. Professionals such as doctors and lawyers will have access to much higher tier policies. It is not unheard of for an individual to purchase a group policy at work, and then purchase an additional individual policy to ensure that they are adequately covered.

Group disability is purchased through your place of employment. This type of DI offers an income replacement rate up to 60 percent of your wages, to a maximum of $5,000 to $15,000 as a taxable amount. This may vary depending on the different criteria at a given company. There are benefits to individual policy types that can be more attractive to some than a traditional group plan. For example, group policies cannot go with you in the event you leave the company, usually offer a 90-day elimination period to age 65 or Social Security age. And these policies can be canceled by the insurance company at any time.

Although the easiest manner in which to obtain a disability policy, group DI policies are not always the best value. In some instances, an individual policy will serve more of an individual’s needs, as opposed to a group plan. Individual disability policies allow you to take your benefits with you in the event you ever leave the company and will usually allow you to get 60 to 65 percent of your income as a benefit in the event you become disabled.

Another benefit to purchasing an individual disability plan is that, unlike the group plan which is taxed (if the company pays the premiums), the individual policies are not taxed when a benefit is paid out. Also keep in mind, individual policies can be purchased with a better occupation definition and cannot be canceled by the company for any reason, and the company does not have the ability to not renew the policy for any reason. This is a key difference that will not matter in a group policy, however, could be vitally important when deciding to go with an individual policy.

Comparing Long Term Disability Insurance Policies

When you’re looking at disability insurance comparisons from different sources, make sure to pay close attention to the specific terms of the policies you are considering. While there are many similarities among long term disability policies, there are a number of important differences that can have an impact on rates. Don’t choose long term disability coverage solely on the basis of price. Instead, make sure you understand exactly how the policies differ before making your decision.

What to Look for in Disability Insurance Comparisons of Benefits:

• Locked Premiums: When you choose a policy with locked in premiums (these are guaranteed renewable/non-cancellable policies), your insurance company can’t raise your rates.

• Non-Cancellable: Before taking out a long term disability policy, verify that it includes a clause that prevents the insurance company from cancelling your coverage as long as you continue to pay your premiums.

• Guaranteed Renewability: Choose a policy that is guaranteed renewable, so you won’t have to worry about becoming ineligible for coverage if your health situation or occupation changes.

• Length of Benefits: Make sure you understand how long benefits will be paid under the terms of the policy. Benefits typically can be paid for 2 years, 5 years, to age 65 or for life. This is a choice you make at the inception of the policy. It is recommended that you take a policy with benefits of at least to age 65.

Identifying the Best Disability Insurance Policy

When looking for a good long term disability insurance policy, it’s important to make sure that you know how to separate the best coverage from policies that aren’t as beneficial to you. Instead of immediately choosing the lowest disability insurance premium, make sure you understand how the policy you are considering stacks up against other options:

Definition of Disability: How is disability defined under the terms of the policy? It’s much more likely that you’ll experience a partial or temporary disability than one that is total and permanent. Be sure that you understand the circumstances under which benefits will be paid.

Residual Disability: The best disability insurance policies include residual disability coverage, which pays benefits based on the percentage of income loss you experience as a result of a disability, both during the time you are unable to work as well as after you are able to return to the job.

Integration of Benefits: Look for a policy with benefits that aren’t impacted by benefits you may be eligible to receive under the social security disability insurance program. Many times, the lowest disability insurance policies specify that benefits are reduced in proportion to social security benefits when and if such become available to the insured.

Understanding Residual Disability Insurance Differences

It’s important to understand that not all long term disability insurance policies define residual disability in the same manner. While it’s important to verify that any policy you are considering purchasing includes residual benefits, it’s also vital to look at how residual benefits are determined:

Time and Duties Definition: 

When residual disability benefits are defined in terms of time and duties, benefits are paid out only until a certain period of time after you are able to return to work on a full time basis. Once you’re back on the job, performing essentially the same duties as you were prior to your sickness or injury, disability benefits will cease.

Income Definition:

With a long term disability insurance policy that uses an income definition of residual benefits, you will continue to receive benefits until your income returns to approximately 85% of the level it was prior to your illness or injury (may vary with each insurance company). Depending on your occupation, particularly if you are self-employed or if your compensation is based on performance or personal service such as a physician, dentist or attorney, it’s entirely possible that your income could suffer the financial effects of a disability for years after you are able to return to work full time.

Disability Insurance Companies

We represent the top disability insurance companies specializing in disability insurance with an own-occupation definition of disability. We believe the financial strength of the insurance company should be a factor in your choice of companies. The following are the insurance companies we represent and their financial ratings with the major ratings agencies:

Tips For Staying Safe On The Job

3 of the Biggest Myths about Disability Insurance

“I’m sure my work has me covered with long-term disability insurance.”

• The truth is that less than 50% of employers in the United States offer disability insurance coverage. Even if you’re certain that you are covered through work, you need to keep some important points in mind. In general, this type of coverage through employers is paid with pre-tax dollars, which lowers the payout to you if you should become disabled. In addition, coverage through work usually has a more limited coverage than a policy you can purchase on your own. Some policies will also stop payments completely if you are able to return to any form of work, which can lead to a big pay cut.

“Long-term disability coverage won’t help me if I’m disabled but still able to work.”

• On the contrary, many long-term policies will pay benefits to the insured, even when they are able to work. These benefits, known as “residual” benefits, will still pay out if you’re only partially disabled – for example, if you can work only part-time or you now need to work a different job or occupation due to your disability.

“I can just rely on government benefits if I become disabled and can’t work.”

• The truth is that it is extremely difficult to be approved for Social Security Disability Insurance – only 35% of initial claim applications are approved and accepted, and even then, the payments most likely will not equal your regular monthly income amount. In 2012, the average SSDI payments were only $1,130 per month.  Along the same line, many people assume that workers’ compensation payments will cover them. However, the fact of the matter is that it won’t cover you in most cases as only 5% of accidents and illnesses are work-related. The importance of having a long-term disability policy that protects your income is incredibly important, and will most likely cost less in premiums than you might think. Protecting your family in the event that you become partially or totally disabled is critical, and is worth the effort to purchase long-term disability coverage you can depend on. Start with a quote today. With something at stake that is as important as your family and your income, can you afford not to have disability insurance?