D Deals with Disability Insurance

D Deals with Disability Insurance
Personal Finance from A to Z
Eileen St. Pierre, The Everyday Financial Planner

I never thought I needed long-term disability insurance. My employer had always provided basic life and short-term disability insurance. The only benefits I ever signed up for were health and dental insurance, along with the retirement plan.

That all changed five years ago when someone I loved suffered a stroke at a young age. Visiting the Neurology ICU unit has a real affect on you. For those patients lucky enough to leave it, most don’t know they are leaving. We were all extremely grateful that my loved one completely recovered. The first thing I did when I returned home was to sign up for group long-term disability through my employer.

Letter d

How will my family pay the bills if I become permanently disabled?

This question scares more people than the thought of death itself. According to the Social Security Administration, a 20-year old worker has a 3-in-10 chance of becoming disabled before reaching full retirement age. Private long-term disability insurance will replace 50-60% of your income.

The easiest way to sign up is through a group policy offered by your employer. If your employer does not offer a plan, or you are self-employed, individual disability plans are available. Like individual health insurance before Obamacare, your medical history will be scrutinized more. So it will be easier for younger, healthier people to get approved for an individual policy than older folks with high blood pressure and back pain.

What are the basic features of a disability policy?

Pay attention to the elimination period – the length of time you have to wait until you get your first disability check. The longer the elimination period, the cheaper the policy will be. If your elimination period is 120 days, do you have enough sick days and emergency savings to wait four months for your disability check? Or would you pay more for your policy in order to start receiving your checks sooner?

How is disability defined? If it is own occupation, this means you are considered disabled if you cannot perform your current occupation. Any occupation means you are unable to perform any occupation. This is more difficult to qualify for, but it will be a cheaper policy.

  • If I am a professional violinist and lose my hand, I can no longer play the violin in the prestigious orchestra.
  • If my policy defines disability as any occupation, I would not qualify for disability benefits because I can still teach music education at the local community college, even if the job pays considerably less.

Other important features to consider:

  • Your policy will state the maximum benefit period (i.e., how long will benefits be paid).
  • Make sure the policy is non-cancelable and guaranteed renewable. You may also want to pay more for cost-of-living adjustments.
  • For a little more money, a future purchase option will allow you to increase your coverage if your wages rise without taking a physical or taking out a new policy – good for those who change jobs frequently.

Doesn’t the government provide disability benefits?

Yes, through the Social Security Disability Insurance (SSDI) Program. Average payments range from $800 to $1400 per month. It can take a really long time to get your application approved. Many have to keep applying after being turned down initially. Some turn to lawyers to help them (I’m sure you’ve seen the commercials).

According to the Heritage Foundation, enrollment in the SSDI program has increased by 25% since the start of the Great Recession. Some predict the program will run out of money in 2016 if changes are not made. While many complain the SSDI program is being used as a form of long-term unemployment compensation rampant with fraud, there could be other factors contributing to the growth of the program:

  • An older, graying workforce
  • Harder to evaluate conditions such as back pain and mental illness
  • Decline in workforce participation

I’ll close this column the same way I started it. It’s amazing how one day in your life can dramatically change you and your family’s future. Don’t let D stand for Dependency.