2004-04-08 / Business & Finance

What Happens If You Become Disabled?

What Happens If You Become Disabled?

What Happens If You Become Disabled?

Here are the basic hazards of life: you can become ill, disabled, you can die, your property can get damaged, you can be sued and lastly, you can wind up in the long-term care institution. This week’s column is about what happens if you should become disabled.

From a financial point of view, disability can be worse than dying. If you die, you are mourned, buried and, hope-fully, missed. Death has a financial upside, in that you are not draining the family’s resources the way you do if you are disabled. How do you deal with the hazard of disability? You ob-tain disability income insurance. This type of policy replaces your income in the event that you cannot work because of the sickness or injury.

The first thing to look for in a disability income insurance policy is the company’s definition of: "What is a disability?" If it says that you have to be in a hospital bed and unable to use a telephone, keep looking. The strong-est (and most expensive) definition of disability says, "You are disabled if you can’t perform job." This is called an "own occ" (occupation) contract.

An example of this policy would be a surgeon who, although unable to perform surgery, can still earn money as a general practitioner or teacher. Even though our hypothetical surgeon is earning money in another occupation (teaching or general practice) he can collect on his disability income policy because he is not performing surgery. There are very few carriers issuing "own occ" policies these days.

Another policy that is widely available (for a lesser premium) is known as an "income replacement" policy. This policy says the company will pay you if you have lost income because you cannot work. The surgeon in the example above would not collect a benefit on this policy because he earned money as a general practitioner or teacher. With this policy you must lose income before you can collect.

After you are happy with the definition of disability, be sure that the policy is non-cancelable and guaranteed renewable. Non-cancelable means that the company cannot cancel the policy because you have become ill. With this type of policy, the only way the company can get off the hook is if you do not pay the premiums. Gua-ranteed renewable means that the premium is guaranteed not to increase and that it will remain in force as long as premiums are paid.

Another consideration in purchasing a disability insurance policy is the elimination period. This is the length of time during which you don’t collect a benefit. The longer the elimination period, the lower the premium. As an example, if you had sufficient savings so that you did not need a benefit for six months, your premium (which is payable every year) would be substantially lower than it would be if your elimination period were 30 days.

The next thing to consider is the duration of benefits. Generally, benefits are available in increments of two years, five years, or to age 65. It’s a good idea to elect the to age 65 benefit because if you are injured in an accident you could be disabled for a long, long time. Compare this to be-coming sick. Generally, if you get sick, in five years you will either be better or dead.

Another important provision of a disability income policy is the partial, or residual, benefit. Most disabilities are not total. Very often you can work on a part time basis. Be sure that the company will pay you a partial benefit and not require you to be totally disabled before you collect nickel one.

In addition to the duration of the benefit, you should consider inflation. A $ 1,000 monthly benefit now will be worth $620 in 10 years assuming a 5% inflation rate. One way to offset this loss of purchasing power is to add an inflation rider to the policy. These are usually pegged to the Consumer Price Index so, if there is an increase in the CPI, there will be a corresponding in-crease in the benefit payable.

Be sure to consult with a qualified insurance counselor when acquiring this insurance because the above, as well as some other elements, will be necessary to get the policy that’s right for you.

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