Understanding Disability Insurance
For my first insurance job I had to learn a presentation word for word. It had a flip chart that we would take to someone and recite our memorized script while flipping the pages in the book. I can't tell you how much I hated doing that. One part of the presentation asked "Have you ever stopped to think about the fortune you will earn – if you live and keep your health?" As much as I hated that presentation it is where I learned the concept of your ability to earn your income may be your greatest financial asset.
As much as most people will agree that all their financial plans are hinged on their ability to continue to earn an income, I am surprised at how many people give very little thought to disability income protection. As long as they have a disability benefit at work they are okay… right? Well, maybe. Here is what you need to know about a disability insurance plan:
- Definition of Disability – in no other kind of insurance is the definition section of the contract so important. The definition of disability tells us what has to happen for you to qualify for benefits. Some coverage's do not consider you disabled if you are able to do any type of job, regardless of your education, training, or experience. Others will consider you eligible for benefits as long as you are unable to perform your occupation. What about if you are able to work part time? Is that disabled? All these questions and more can be answered by knowing your policies definitions.
- Key Contract Provisions – there are a couple key variables in all disability insurance. The benefit is how much you will receive if you become disabled. The benefit period is how long you will receive benefits as long as you remain disabled. The elimination period is the "waiting period" between becoming disabled and becoming eligible for benefits.
- Inflation protection – some policies increase the benefit you receive during a period of disability annually by an inflation factor. Especially in a long term disability contract, this is of obvious importance.
- Social Security Integration – How does your disability insurance respond to social security disability benefits? Some policies pay regardless of social security. Other policies reduce their benefits based on social securities payments. Don't wrongly assume you are eligible to receive both.
- Taxation of benefits – Who pays the premium? That is the ultimate factor in determining the taxation of any benefits received. If you pay the premiums with after tax money, then disability benefits are received income tax free. If your employer pays the premiums or you deduct the premiums from your income, then the benefits become taxable when you receive them. Obviously 60% or more of your income tax free should allow you to maintain your standard of living. 60% of previous income before taxes would present a big problem to most families.
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