Wednesday, November 26, 2008

Some Factors to Consider when Purchasing a Disability Insurance

Here are some factors to consider when purchasing a disability insurance policy, either through your employer or by yourself.
  • “Own occupation” or “any occupation” What is the definition of disability in your policy? Does it mean being able to work in the occupation in which you were engaged when you became disabled, or in any occupation? For example, if you are a surgeon who injures your
    hand and can no longer work as a surgeon, perhaps you could work as a teacher. The tighter the definition of disability, the higher the monthly premium.
  • Guaranteed renewable and noncancelable. Look specifically for these two clauses in any individual policy, and don’t expect any guarantees past your plan year from an employer-sponsored group policy.
  • Tax-deductible premium or tax-free benefits. In general, if your premium is paid by your employer or yourself (with an FSA, discussed later in the chapter) with pretax dollars, disability benefits are taxed as income when you receive them. If your premium is paid with after-tax dollars, benefits are not taxed when you receive them. The conventional advice in the insurance industry is to pay your premium yourself or with an after-tax payroll deduction so disability benefits are not taxable income when you receive them, as that is when you will need the extra income the most.
  • Elimination period. This is the amount of time you must be disabled before benefits begin, typically 90 to 180 days, which is often covered by a short-term-disability policy. Some states have mandated state short-term-disability coverage, so check before you buy any—residents of California, Hawaii, New Jersey, New York, and Rhode Island are guaranteed their full after-tax salary (up to a reasonable maximum) for 6 weeks if they become disabled, then 50 to 60 percent for 20 more weeks.
  • Supplemental or overlapping coverage. Some policies guarantee you a fixed benefit, say $5,000 a month, reduced by any benefits you received from government entities like Social Security. This is usually a good option to lower your current premium, since it shifts the risk of ever obtaining government benefits onto your private disability carrier. Do not depend on Social Security or any governmentmandated disability benefits when you calculate your disability requirements.
  • Premium waiver, partial disability, and so on. Premium waiver specifies that your premiums will be automatically paid when you are receiving benefits. Partial disability specifies your benefits in case of only partial disability. These and other terms should be reviewed with your benefits administrator or an insurance agent licensed to sell disability

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