DISABILITY INSURANCE
Risk Management
TRMK Risk Management, Inc. represents many of today’s major insurance carriers to provide life, long-term care, and disability insurance solutions for clients.
Disability Insurance
Disability insurance helps replace a portion of your income should you be unable to work due to an illness or injury. Coverage can be provided as a benefit through work or with the purchase of an individual policy. Some key issues to consider are the length of coverage, amount of coverage and the level of disability required before coverage begins.
What is the Risk?
According to a recent study, most people estimate they have only a 16% chance of becoming disabled during their working years1 — in spite of the following startling facts2:
- If you're under age 35, chances are one in three that you will be disabled for at least six months during the course of your career.
- Men have a 43% chance of becoming seriously disabled during their working years.
- Women have a 54% chance of becoming seriously disabled during their working years.
- At age 42, it is four times more likely that you will become seriously disabled than that you will die during your working years.
Short-Term vs. Long-Term Disability
Disability policies can generally be classified as either short-term or long-term.
Short-term disability benefits are often included as part of an employee benefits package. Short-term disability plans replace income for the early period of a disability. In general, the plans provide benefits that range from as little as two weeks up to two years. Plans often have a waiting period, sometimes called an elimination period. The waiting period is the period of time after you become disabled until your benefits begin.
As with short-term disability plans, your employer may provide long-term disability coverage. However, most long-term disability policies are purchased on an individual basis. Benefits help replace income for an extended period, often five years or until the disabled person turns 65.
Individual Policy vs. Employer-Provided
Disability policies are usually designed to replace between 50-70% of your income before illness or injury. Whether a disability policy is purchased through your employer or on an individual basis can have a significant impact on benefits received. First, the definition of disability is much more difficult to meet in a policy purchased through work. You may be unable to work, but according to the policy, the definition of “totally disabled” has not been met. With an individual policy, the definition of “totally disabled” is generally more liberal, especially if the policy has “Own Occupation” language. An “own occupation” policy means that you may be able to receive benefits even though you are able to work, just as long as you are unable to work in the occupation you had before the disability.
Second, benefits received on an individually paid disability policy are generally tax free, meaning that a larger portion of your after-tax income is being replaced. If your employer pays the premium, the benefit will likely be taxed. If you receive 60% of your pre-disability income and are taxed on this amount, your actual benefit will likely be less than half of your pre-disability income.
Non-Cancelable and Guaranteed Renewable
In addition to how a policy is acquired, there are two other features of a disability policy that you need to understand: non-cancelable protection and guaranteed renewable protection. An insurer cannot cancel or refuse to renew either type of policy as long as premiums are paid on time. These features differ, though, in important ways.
- Non-cancelable. The policy’s premium can never be raised above the amount shown in the policy and benefits may not be reduced as long as premiums are paid on time.
- Guaranteed renewable. You have the right to renew the policy with the same benefits, but the insurer can increase your premiums—as long as they are increased for all other policyholders in the same class (i.e., having the same characteristics).
Customizing Your Disability Plan
Most insurers offer several optional benefits (called riders) to enhance disability income coverage. Common riders include:
Cost of Living Adjustments (COLA). COLA provides for an annual increase in benefits (generally after you have been disabled for a year), usually based on a Consumer Price Index or a predetermined percentage. This helps your benefits keep pace with inflation and is particularly important if you are disabled for a long time.
Future Purchase Option (Guaranteed Insurability Option). This rider allows you to purchase additional disability income insurance as your income increases without providing proof of medical insurability. Even if you develop a condition that would normally prevent you from obtaining additional coverage after you purchase your original policy, you could still increase your benefits.
Residual Benefit. This pays you a portion of your monthly disability benefit if you have a drop in income due to a disability (e.g., if you are working part time). In most cases you need to satisfy a minimum percentage loss in earnings (e.g., a 20 percent loss) to qualify.
Social Security Rider. If you are disabled, these riders pay you additional benefits if you are not able to receive Social Security disability benefits because of the Social Security Administration’s definition of disability. Usually, an individual disability policy with this rider will pay after the waiting period for the policy and during the five-month period (sometimes up to a year) while you are waiting for Social Security to kick in. If Social Security denies your claim, this rider will continue to pay benefits for the duration of the benefit period. Before purchasing a rider to your policy, ask yourself if you would be able to pay for the benefits provided by this rider out of your own pocket.
Conclusion
While we spend a great deal of time working to succeed in our jobs and careers, few of us think about ensuring that we have a safety net to fall back on should we become disabled. Although it may be hard to face the likelihood of becoming disabled, the consequences are a lot easier to picture. Without an income, most people’s savings are rapidly depleted as they struggle to maintain the household and pay their various expenses. Many begin to suffer real financial need – often with no end in sight as the disability lingers on.
A disability can have a dramatic impact on your lifestyle, your business—even your retirement. It’s important to make an informed decision about whether you need individual disability insurance and, if so, what features are most important.
For more information, please call 601.208.8605.
1 - Gallup (508 respondents ages 30 to 65) reported by Best’s Review.
2 - 1985 Commissioners Disability Table
TRMK Risk Management, Inc. is a wholly-owned subsidiary of Trustmark National Bank, a licensed insurance agency, and a division of Trustmark Wealth Management. Insurance products are not deposits or other obligations of, guaranteed by, or insured by Trustmark National Bank or any of its affiliates and are not insured by the FDIC or any other agency of the United States.
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