§The sole purpose of individual disability insurance is to replace your after-tax income in the event of an accident or illness. These policies do not provide protection from medical expenses or recovery of damages for “pain and suffering”.
§Since the benefit payments are designed to be income tax-free, insurance coverage in the amount of 2/3 of your salary is roughly equivalent replacing your net take-home pay. This is usually the maximum amount of insurance that you can purchase.
§Be prepared to show the insurance company a pay-stub is you are salaried or an income tax return if you are self-employed to prove the amount of insurable income.
§If you are self-employed, you can only insure the amount of net income that you reported on your tax return, even though your actual earnings might be much higher. In this case, you might want to supplement your insurance with “business overhead coverage” that does not depend on net income.
§Expect the insurance policy to exclude or limit coverage for pre-existing conditions. If you have a bad knee, for example, expect that your policy might have a 5 year rider on claims due to knee injuries.
§Most policies are issued for a term of five years of coverage, although you can buy a longer or shorter benefit amount.
§Most policies have a 90 day waiting period before you can begin collecting a benefit, but you can buy longer or shorter waiting periods.
§Most policies integrate with Social Security disability insurance. This means that the total amount of the benefit you collect will not exceed your net after-tax income before you were disabled.
§Most policies may be continued year after year until you retire. But the average life of a disability insurance policy is about 5 years.
§The average time required for an insurer to review an application is about 3 weeks. The insurer may request copies of medical and financial records.
§Applications are still submitted on paper; no online enrollment system is available.
§Expect the premium cost to be about 2% of your salary if you have a “desk job” and about 4% of your salary if you work with your hands. Of course, this is a very rough guideline, and the actual cost will depend on a greater number of individual factors.
§When a policy is issued, you have at least 10 days to review all of the details and cancel the coverage if you are not completely satisfied. It may be useful to have an independent financial adviser review the new policy during this period.
§Assuming that you keep disability insurance for the balance of your working career, the probability of suffering a loss of income due to accident or illness sufficient to trigger a claim under your policy is about 1 in 4.
§If you become disabled, you should consult with an attorney who specialized in disability insurance claims before filing a claim with the insurer. This may help avoid delays and disputes regarding the claim.
Tony Novak, MBA, MT, is a financial adviser based in Narberth, Pennsylvania. He is editor/publisher of “Tax and Benefit News” and moderator of the tax forum for financial planners at “Financial Planning Interactive”. He is available by telephone at 1-877-529-7435 to address public inquiries on tax and benefit planning issues free of charge through OnlineAdviser service sponsored by www.MedSave.com and www.FreedomBenefits.com.
