Income tax time brings you face to face with the amount of money you earn — and have left to live on, after taxes. But what if you were disabled and couldn’t work? It’s something no one wants to think about: being alive but incapacitated. But consider the odds.
The Disability Insurance Resource Center says that for a 32-year-old, a serious disability (three months or longer) is 6 1/2 times more likely than death. It also notes that only 3 percent of mortgage foreclosures are caused by death, while 48 percent are caused by disability.
The average disability lasts two to four years, but some people are disabled for life. So it makes sense to insure your ability to earn an income. And that’s where disability insurance comes in. There are basically two ways to purchase disability insurance.
Disability insurance may be offered as part of a group benefit provided by your employer or purchased independently. It costs less when purchased through a company benefits plan, and premiums are usually paid with pretax dollars. But if you ever have to receive a monthly disability check from a company plan, you’ll owe income taxes on the payments.
If you buy a disability policy on your own, you can expect to pay more, and you won’t receive any tax deduction for the premiums, but any future payouts will be tax free. And keep in mind that if you leave your company, your group disability insurance may not be portable.
Keys to disability insurance
The most important consideration is the policy definition of what constitutes a disability. Some policies pay benefits if you are unable to perform the duties of your customary occupation; others pay only if you cannot work — or are not working — at any gainful occupation. And a policy may cover only the difference between what you can earn after your disability and what you were earning before the illness or injury, up to the limits of the policy.
You also want to make sure your individual disability policy is guaranteed renewable, which means the company cannot cancel unless you fail to pay and premiums can only be increased if the entire class of insureds in the state is impacted equally.
Of course, you’ll have to take a physical exam before the policy is originally issued. As well, your driving record, earnings history and tax returns, and medical history from the MIB (medical information bureau) will be examined. They will also contact your health care provider for a full set of medical records. Most underwriters are very picky about covering mental or drug-related disabilities.
Pricing disability policies
The key pricing considerations relate to your age and health, as well as your occupation. But there are other variables:
—The amount of monthly benefits. This amount is typically limited to 60 percent of your current pretax income.
—The waiting period. This is the lag time before payments start, usually a minimum of 90 days. (You should have enough savings to cover that gap period.)
—Term of benefits. It’s most common to purchase coverage to the age when Social Security will provide ongoing income. You can save money by buying coverage for a shorter period in order to lower the cost, but once you are disabled you might need coverage for longer than you ever dreamed.
—Residual benefit. With this option you can collect a monthly benefit if you have a loss of income when disabled but are working and earning less as a result of your disability.
As a general rule, the best disability insurance policy for a professional worker (not one in an industrial occupation) in good health should cost roughly 3 percent of your annual pre-tax income (or net income for self-employed people). For a 40-year old professional earning $100,000 per year, that amounts to a monthly cost of roughly $250. You can get quotes from major insurers at www.DI-Resource-Center.com.
It’s worth taking a closer look, especially if your loved ones are depending on your income. And that’s The Savage Truth.