Reasons to have disability insurance, which pays you when illness or injury keep you from working, are rapidly mounting.
Financially strapped families have become more dependent on all their income earners. Baby Boomers are entering peak earning years, and many are part of a "sandwich generation" that's caring both for its children and its parents.Due to medical advances, once life-threatening conditions now result in long-term disability. The typical 42-year-old individual is 3.5 times more likely to suffer long-term disability than to die before the age of retirement. Longevity is another factor; 60 percent of Americans turning 65 this year can expect to live to age 85.
Yet only about 3.7 million Americans have disability insurance, since it traditionally targeted upper-income individuals and was expensive. These days, more carriers are aiming at middle-income folks with affordable policies that have less features but are comprehensive enough for most needs.
An individual disability insurance policy can cost from several hundred dollars to more than $1,500 a year. Meanwhile, group policies through work are either paid for by the employer or offered at low cost to employees. They typically provide 50 to 60 percent of income beginning three to six months and ending in two years after one stops working.
"Most large companies offer disability insurance that starts as soon as your salary continuation stops, those plans varying from company to company with typical caps on benefits of $5,000 to $10,000 a month," explained Kate Brower, consultant with the Hewitt Associates benefits consulting firm in Lincolnshire, Ill.
Remember that if the employer pays for disability insurance, the benefit is taxed as income. Disability benefits are tax-free if you paid for your own insurance.
When shopping for individual coverage, a guideline is to seek to replace 60 to 70 percent of current pretax earnings. It's best to buy a policy that can't be canceled, has level premiums to age 65 and is offered by a firm with a solid background in such coverage. Leaders are Paul Revere, Provident, UNUM, Northwestern Mutual, Connecticut Mutual, Minnesota Mutual and Mutual of New York.
"There are two primary forms of individual disability policies, the first being the noncancelable type with a level premium the company can never change for any reason," said Thomas Wildsmith, policy research actuary for the Health Insurance Association of America trade group.
The second type is guaranteed renewable coverage, also with a level premium, he added. But, if the company is losing money on all the policies it sold, this policy permits it to go to the state insurance department and apply for a rate increase.
"Think about the worst thing that can happen, how long you could live without income and what other financial planning you've done," counseled Keith Maurer, president of Fee for Service, a Tampa-based distributor of low-sales-charge products for individuals and financial planners.
Decide whether you want to save money by agreeing to a longer waiting period before benefits begin, or whether you'd really need income replacement sooner, Maurer said. Determine what you want in a policy and which of the available riders you really need.
"First deal with the base policy so that you don't get confused, then add riders carefully, such as a cost-of-living increase that makes a big difference if you're disabled for a lifetime," said Ben Baldwin of Northbrook, Ill., who is a certified financial planner, Equitable Life agent and author of insurance books.