Do One Thing: Buy Disability Insurance (time: a few hours)

Kate Ashford  |  02:03 PM, Monday, April 18, 2011

What would you do if you were in a car accident and couldn’t work for six months? Or you got cancer and had to take unpaid time off? How would you manage your bills? That’s where disability insurance steps in—it pays a percentage of your salary if you’re unable to work due to injury or illness. Got some? If you’re like most people, you probably don’t. Here’s how to remedy that.

This is for you: If you and/or your spouse or significant other are dependent on your salary for income to live on and to build savings. Social Security also pays disability benefits, but it may take more than a year to process a claim, eligibility rules are very strict, and benefits are limited.

Cost: Unfortunately, disability insurance isn’t cheap—and it’s more expensive for women. (Isn’t everything?) Men will typically pay 1 to 3 percent of their annual salary, and women can pay as much as 3 to 5 percent. Coverage is much less expensive if you can get it through your employer or a professional organization.

Hands-on time: A couple of hours to research companies, talk to a broker, apply for coverage, and have a medical exam, if necessary. (It usually is if you’re applying for individual coverage.)

Total time: Four to ten weeks for total processing, depending on your health history.

Terms you should know:
Benefits: Long-term disability policies usually pay 60 to 70 percent of your current salary. If you pay the premium (i.e. it’s a policy you bought individually), the payments aren’t taxable. If you get disability coverage through your employer, you’ll pay taxes.

Cap on benefits: There may be a cap on the monthly benefit you receive.

Definition of disability: Choose “own occ” (for your own occupation) rather than “any occ” (for any occupation). That way, the benefits pay out if you can’t perform your regular occupation, not just if you can’t perform any occupation. For instance, if you can’t perform your duties as a neurosurgeon but could perform other jobs such as a Starbucks barista, you would receive benefits.

Elimination period: The waiting period before benefits kick in, usually 3 to 6 months.

Benefit period: How long the benefits will last—until a certain age, such as 65, or when Social Security payments begin.

Cause of disability: Should cover whether disability arises from illness or injury on the job or off.

Residual benefits: The policy should pay a portion of benefits if you’re able to work part-time.

Guaranteed renewable: You shouldn’t have to re-qualify for coverage or to increase your benefit each year.

Non-cancelable: The insurance company shouldn’t be able to cancel coverage or raise the premium for any reason.

Retirement protection: A benefit that would continue to make retirement plan contributions for you in the event that you’re disabled.

Overhead expense insurance: A benefit that would cover the normal and necessary expenses incurred to run your business (if you’re self-employed) such as rent, utilities, etc.

What you’ll need:

• An Internet-connected computer
• A general knowledge of your earnings history
• An understanding of your health history (typically the past five years)
• An understanding of any disability benefits your employer offers

What to do:

1. First, see what your employer offers, if anything. If your employer offers coverage, that’s typically your best option, although you should keep in mind that those benefits will be taxed. So if your employer offers coverage at 60 percent of your salary, it may be more like 40-50 percent after taxes. If that’s not enough, you may want to consider getting an additional individual policy to cover the gap.

2. Check with any professional organizations of which you’re a member (or of which you could become a member), such as the Freelancers Union or your local Chamber of Commerce.

3. Ask friends, family and colleagues (or your financial planner, if you have one) if they can refer you to a good disability insurance provider or broker.

4. Search online for a disability insurance broker in your area. (Try searching for your city and “disability insurance broker.”) They’ll typically be able to take your information and provide you with quotes from several reputable companies.

5. Call individual companies for information. Top sellers include Mass Mutual, UNUM, Northwestern Mutual, Berkshire Life, Met Life, and Guardian.

6. Compare plans.


• What are the coverage specifics?
• How much is the premium for the coverage that you want?
• What is the insurance company’s rating? As with any insurance coverage, you want to make sure you’re buying a policy with a stable, highly rated company that’s going to be around for a while.

7. Apply for coverage with the company of your choice. You’ll have to answer some health-related questions and you’ll probably have to have a medical exam. (That usually involves having a paramedical come to you for a brief workup. He’ll take your height, weight, blood pressure, blood and urine samples and he’ll ask you some medical questions.)

8. Pay your premiums on time and enjoy some peace of mind.



To learn more:
Do You Need Disability Insurance? (SmartMoney.com)

Did you do it? Tell us what worked or share other tips in the comments below.

Who helped: Bob Gertie, Advisor Insurance Resource; Bridget Sullivan Mermel, a certified financial planner in Chicago




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