Chapter 1

Disability: Lack of ability or power; incapacity; also, lack of competent means or instruments; also, legal capacity; a legal disqualification. To deprive of ability or power; incapacitate; render incapable of action or use; cripple; injure or impair; specific, to render legally incapable; disqualify; also, to pronounce incapable; disparage or belittle. - The New Century Dictionary 1936

  One of the first things to do when deciding how much coverage one needs is to decide if a person needs disability insurance at all. This chapter discuss with who needs disability insurance, how much and how long coverage should last.

Who Needs Disability Coverage?

  In the book Insurance - What Do You Need? How Much is Enough? by David W. Kennedy, he introduces his chapter on disability insurance like this: "If you absolutely had to, you could do without life insurance. If state law didn't demand it, you could probably also do without auto insurance. If you could replace your home out of your earnings and savings, you could even manage without homeowners insurance. Similarly, if you could handle unanticipated medical bills without too much problem, health insurance would not be necessary."

  "But compared to all of the other policies, disability insurance is something you most certainly should not be without, particularly if you are the family breadwinner and the family depends on your income."

  Keeping this view in mind, every family breadwinner needs to be covered by a disability insurance policy. Even single people may want to think about disability insurance because they do not have the luxury of falling back on a spouse's income if a disability happens to them; they are in effect a one-person family. The financial burden then may fall on family members that are not equipped to handle that burden. While life insurance is designed to replace income for a family with multiple members who lose their prime source of income, disability insurance replaces income for a single breadwinner or for a whole family.

  Seeing the need for disability coverage also involves an examination of the occupation of the breadwinner of the family. Some occupations are more likely to incur a disability than others. Disability insurance is really "income replacement" insurance. It can provide a family with a good portion of the cash that the family will need to live on during the period of disability. If the breadwinner has a heart attack and could not work, or was involved in a car accident and could not work, the family would suffer greatly if the remaining spouse's income could not support the family. If the remaining spouse did not have a job at the time of the disability, then no income would be coming in at all. The family would be watching this financial tragedy happen without being able to do too much about it.

  This scenario should not be used to scare a person into buying disability insurance, but to make them aware of the benefits that disability insurance can give to a family that suffers such a tragedy.

  Disability insurance differs in one major way with health insurance. Health insurance pays for hospital and doctors' costs incurred as the result of an illness or injury due to an accident. Auto insurance policies normally have a medical rider that can be attached to the policy for added premium costs that would cover the insured, the policyholder, and the occupants if an accident occurred. Disability insurance provides the insured with money to live on while recuperating.

When individuals are trying to decide if they need disability insurance, they may overlook the fact that income will be lost if the breadwinner is in an accident. If the family has health insurance, a bulk of the debt that would build up as a result of the injury would be greatly reduced, though, mortgages and home maintenance bills would continue to build up. Disability coverage replaces the hefty portion of the lost income as a result of the disability. While the disability insurance policy does not pay doctor or hospital bills, the money can be used for such purposes if the family does not have adequate health insurance coverage.

  A person may be able to get disability insurance that replaces 100 percent of the lost income for as long as he or she is disabled. This coverage would likely be very expensive. It is usually not necessary that all the family's income be replaced.

Why not replace 100% of the family's income?

  This may be a common question that a person may ask: why does the family not need to replace 100 percent of the income lost. The reason is simple. If the breadwinner is disabled, the costs of commuting to and from work would be eliminated, not to mention the cost of meals if they eat at restaurants for lunch. They may not need to replace clothes as often because they will undoubtedly be spending most of their time in bedclothes or very casual clothes. There may be other business related expenses that will be eliminated when the disability occurs.

  Another consideration is that the person is not drawing a salary, which means they do not need to worry about taxes. The family will be paying a good deal less in taxes or no taxes at all. The money received from the disability coverage may be considered tax free if they paid for the premiums themselves with after-tax dollars.

How much coverage is needed?

  The most valuable asset while the breadwinner is alive is their income. The disability coverage should equal 60 to 70 percent of the total current gross salary. If the disability benefits are received tax-free and the benefits fall among the 60 to 70 percent mark, then the disability income will compare favorably with the current after-tax income received. Because certain expenses will be eliminated as a result of the disability, a family may be able to survive on even less.

  For those families that earn more than $100,000, the insurance company may actually reduce the percentage that they will cover, thus they may cover 60 percent of the income. A family and the agent may need to ask the insurance company how much they will cover in the policy. The family could then decide whether or not accept that amount of coverage.

  If a person is disabled for five months or more, they may be eligible for Social Security, if they meet all the qualifications. Even if they do, it will only replace an estimated 15 percent of the average monthly income. The person must be disabled for a full five months before they can collect from Social Security. A disability policy that starts paying benefits earlier would supplement that well. There is no guarantee that the person will be eligible for or receive Social Security benefits.

  Worker's Compensation covers work related injuries. This type of disability payment varies widely, according to state law. The maximum is 66.6 percent of the individual's pre-disability gross wages, or 80 percent of the take-home pay, up to a specified ceiling. Employers buy worker's compensation for their employees; the self-employed have to buy their own.

  There are also different types or degrees of disabilities. They can range from a severe disability to a short-term disability. There are five different classifications of a disability. They are:

1. A Permanent "total" disability

2. A Long Term "total" disability

3. A "total" to "partial" or recurrent disability

4. A Progressive "partial" disability

5. A Short Term "total" or "partial" disability

  A permanent disability is one that is irreversible. It could be the loss of both eyes, the hearing in both years, a loss of limbs, or a loss of speech.

  A long-term disability (LTD) is a broader classification. These types of disabilities have a long term effect on the individual's life. These impacts could cause one not to be able to go back to their job, or are severe enough that they are unable to do any type of work again.

  A total to partial disability is characterized by falling back into their disabilities after going back to work. The insured's disability is reoccurring.

  A progressive disability causes the most unpredictable effects because they are often sporadic. Individuals affected in this way can sometimes work full or part time or in the extremes, not work at all.

  A short-term disability (STD) is temporary. In this classification, three types exist:

a) Total disability,

b) Partial disability, and

c) A combination of partial and total disability.

  These short term disabilities can consist of broken bones that will repair but still cause the individual to be disabled because they cannot perform their duties at their job. Short-term disabilities could cost the most financially. The financial hardship caused could actually be long term.

  Under each circumstance, the family needs to be informed of what the policy will cover and what it will not. If something is not covered that the family needs or wants, riders can be offered that can meet their needs.

  A precise amount may hard to ascertain. A family needs to sit down and figure annual living expenses. This needs to be a completely detailed account. If "extras" can be eliminated, the benefit amount and therefore the premium amount can be lowered. Once a total is established, subtract all sources of income. This includes investments and Social Security that the person may be eligible for since they are disabled. The list on page five, which is based on those from the Health Insurance Association of America, may help a person keep in mind what needs to be considered.

  A family considering how much they will need should also look at existing policies to determine if disability riders on policies like life, auto or homeowners will pay the premiums on those policies during a period of disability. This, of course, would alleviate quite a bit of needed income. These riders could be expensive. Careful planning will help a family make the most financial promising choice. Some lenders may require such insurance on loans such as auto or home mortgages.

  There is no such thing as a family disability policy. When this text refers to family planning, it is in the context that both husband and wife are making the insurance decisions.

	Monthly Expenses
	Today:	If Disabled:
Mortgage/Rent:	$ ________________	$ ________________
(Include property taxes)
Utilities:	$ ________________	$ ________________
(Oil, gas, electric, water, phone)
Home Maintenance:	$ ________________	$ ________________
Food & Clothing:	$ ________________	$ ________________
Insurance / Auto:	$ ________________	$ ________________
Home:	$ ________________	$ ________________
Life/Health:	$ ________________	$ ________________
Transportation:	$ ________________	$ ________________
Medical/Dental Care:	$ ________________	$ ________________
Education:	$ ________________	$ ________________
Recreation:	$ ________________	$ ________________
Family Spending Money:	$ ________________	$ ________________

  It is important to remember all aspects of income and monthly expenses when determining how much the family needs to support them in case of an emergency. In practical terms, a family may be doing well just at minimum coverage to cover the mortgage and basic living expenses. To worry about future education, medical, dental, or recreation expenses can put a burden on the family and premium on such a disability policy may be astronomical. Practicality should be the first concern. If the family ever experiences financial trouble, the disability policy may the first to go. Setting a premium a family can live with in good and bad times is important. As for college expenses, if the insured does experience a disability, likely their children would qualify for financial aid of some sort.

  The above suggestions are there for people to think about. They are not absolutes. An insurance agent must inform the family of things to consider when choosing an amount of coverage. If they decide to just cover the mortgage, the family will know what to expect if or when the disability occurs.

Substitute Income for Expenses When Disabled:

	Monthly Benefit:	Waiting Period:	Benefit Period:
Group Disability Insurance:	$ ________	$ ________	$ ________
Social Security:	$ ________	$ ________	$ ________
State Plans:	$ ________	$ ________	$ ________
Worker's Comp:	$ ________	$ ________	$ ________
Credit Disability:	$ ________	$ ________	$ ________
(In some auto or home loans)
Other Income:
(Stocks, bonds, spouses income)	$ ________	$ ________	$ ________
Personally owned
Disability Insurance:	$ ________	$ ________	$ ________
Total Monthly Substitute Income:	$ ________	$ ________	$ ________

NOTE: Benefits are often coordinated so that one program's payments are reduced in recognition of benefits from another program, such as Social Security or Worker's Compensation. "Coordination of Benefits" will want to be considered.

How Soon Should Benefits Begin?

  Insurance companies offer the insured different times at which benefits would start paying. The DI policy could start paying benefits as soon as the insured is disabled, but these policies are very expensive. To reduce the cost of the DI coverage, a policyholder could allow the insurer to defer benefit payment until a period of time after the disability occurs. The insured could wait 30, 60, 90, or 120 days. This referred to as a waiting or elimination period. The longer a family can wait to begin drawing benefits, the cheaper the premium will be.

  The insurance company pays the DI benefit at the end of the month in which it is due, so with a 90 day waiting period, the insured would receive the first payment 120 days after the start of the disability.

How Long Should Benefits Last?

  Disability policies are designed for nearly every conceivable need. A person can have a policy that will limit the length of time they can collect benefits from one to five years, or even collect until the insured is 65. The shorter the length of time benefits must be paid, the cheaper the policy. Some insurance companies will not even accept certain occupations. (For example, people who are self-employed or someone who is not employed with just one company, i.e., an insurance agent that is not vested with one company.)

  Other occupations, like blue collar, may not have the option of benefits to 65 because of the line of work they are in. For example, people who are in construction may not be eligible for benefits to 65. Their length may be limited to up to five years. White-collar jobs normally do not have these limitations on benefit periods.

  Before anyone chooses the benefit length for the policy, they need to think of the family's needs. If the family can only afford premiums for a benefit with a limited length of time, then some coverage is better than none. It has been recommended to try to get "lifetime" coverage or coverage to age 65. Remember, not all occupations have this option.

  One company may not allow a certain occupation with the disability lifetime benefits, whereas another will. Almost everyone knows that insurance premiums vary from company to company, but so do benefits, options available and even elimination periods.

Point to Remember:

Will the DI policy reduce payments if the family

 receives additional coverage from an outside

source, thus maybe reducing the expected income the family projected?

Managing the DI Benefits

  An often overlooked aspect of disability coverage is the proper management of the available benefits. Social Security will not issue benefits until five months of a total disability have lapsed and the DI coverage (either individual or employer-provided) may have a 90-day waiting period before the insured receives benefits. ]

  An insured could purchase a short-term (1-90 days) disability policy. Many employers provide both the short term and the long-term plans. Most short-term plans do not last longer than six months.

  When combining long term and short-term disability benefits, try to make the waiting period of the long-term plan equal to the maximum of the short-term plan.

End of Chapter 1

United Insurance Educators, Inc.

2012