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DISABILITY INSURANCE BASICS
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If you became sick or hurt and couldn’t work, how would you pay your bills? How would you maintain your living standard? If you’re like most people, your ability to get up each day and earn an income is one of your most valuable assets. Furthermore, your chances of becoming disabled at some time during your working career are probably higher than you would expect.
Disability insurance can replace a portion of your income when you are unable to work because of injury or illness. There are two major types of disability coverage:
Short-Term Disability
Short term disability provides an income for the early part of a disability. A policy may pay benefits for two weeks up to two years. Short-term disability is often included as part of an employee benefits package.
Long-Term Disability
Long term disability helps replace income for an extended period of time, usually ending after five years or when the disabled person turns 65. Some people have long term disability insurance provided by their employers; others purchase it individually. There are two major types of individual long-term disability insurance: noncancelable and guaranteed renewable. (Other less expensive policies with limited, if any, premium or renewability guarantees are also sometimes available.) In the case of non-cancelable or guaranteed renewable policies, the insurer cannot cancel or refuse to renew the policy as long as the required premiums are paid on time. The key difference between the two major types of policies is that under a non-cancelable contract, you have extra security that premiums can never be raised above those shown in the policy as long as the required premiums are paid. With a guaranteed renewable policy, the premiums can be raised, but only if the change affects an entire class of policyholders. For this reason, initial premiums for guaranteed renewable policies can be less expensive than non-cancelable policies |
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WHEN WILL DISABILITY INSURANCE PAY?
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The definition of disability can vary depending on the policy you have. For example, some plans pay when you’re unable to engage in your own occupation, while others pay when you’re unable to engage in any occupation for which you’re reasonably suited based on your training or experience. It’s common to use an own-occupation definition for two years, three years or even longer, with an any-occupation definition thereafter. Many disability plans require that you not be gainfully employed while you’re collecting benefits. In addition, some policies will pay you a portion of your monthly benefit if you have lost a part of your income due to a disability. (This is usually referred to as a residual or loss of earnings benefit.)
Some policies include a rehabilitation benefit that pays some or all of the cost of a course of occupational rehabilitation approved by the insurer. Keep in mind that many policies will not cover disabilities caused by suicide attempts, drug abuse, war, or attempts to commit a crime. Pre-existing conditions are also frequently excluded. |
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HOW MUCH DISABILITY INSURANCE WOULD I NEED?
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You normally should plan on replacing at least 60% of your net after-tax pay and preferably 80% if you can afford the additional coverage. If you purchase disability insurance with after-tax dollars, your benefits usually will be income tax-free. However, be aware that if you have group disability insurance provided by your employer, these benefits generally will be taxable. Small business owners have special concerns and should consider talking to an expert about overhead expense policies and other special considerations.
To correctly determine the actual amount of coverage you would need if you became disabled, ask yourself how much monthly income would cover your living expenses. Would these expenses go up or down if you became disabled? These expenses must be carefully considered. Work-related expenses will go down. Medical expenses may increase. Education expenses may increase as you retrain. Some insurance policies may have premium waivers. By considering all these factors, you should be able to come up with an appropriate amount.
To get an estimate of how much disability insurance you may wish to have, you should calculate how much you spend each month. |
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