Disability Insurance: The Good, the Bad, and the Miserable
By Scott Simmonds, CPCU, ARM, CMC

Disability income insurance coverage is missing from far too many individual financial plans. If your family depends on your income for support, you need to protect that income from your inability to work caused by an accident or sickness.

Disability insurance policies can be a part of a group policy through your employer or an individually purchased policy. Some trade associations also have policies available for members.

Disability coverage is considered health insurance. Most group policies do not require health statements or physicals. Many association plans do. Many such policies will have some form of provisions that limit coverage for preexisting conditions.

Individual policies are underwritten much like life insurance policies - many questions about lifestyle and health. You will also have to justify your income by tax records and pay stubs.

The Monthly Benefit
Group disability insurance policies are usually stated as a percentage of your monthly income. For individuals the insurance company will offer an amount of coverage based on your earnings.

Realize the Tax Issues of Disability Benefits
If you pay the premium for your disability insurance, use pre-tax dollars or the benefits are taxable. So, if your employer pays the premium for you (a group disability policy for example) you will pay tax on any benefit you receive in a claim. If you pay the premium from your take-home pay then the benefits are not taxed. Consider taxes when determining how much disability coverage you need.

Understand the Definition of “Disability”
What constitutes a disability under your policy? Look at the policy and the definition. The language should be clear. If you don’t understand the coverage, ask your agent.

Look For “Own Occupation” Coverage
The best coverage is protection that pays when you are unable to perform “your” occupation. Avoid policies that pay only when you are unable to perform "any" occupation. Some policies pay if you are unable to perform any gainful employment for which you are reasonably qualified based on training and education.

If your disability coverage is a group policy, it’s tough to dictate terms of protection. Know what you’re buying, though. Review the plan documents. Perhaps a supplemental disability policy is in order

Use a Long Waiting Period
Waiting periods are the time you must be disabled before the policy starts to pay. Think of it as a deductible. Longer is better as it reduces premium.

Consider Buying Coverage to Retirement
Disability policies are issued with different terms of coverage - one year, five year, to age 65 for example. Buy the longest term you can. To age 65 is the best for most people. If your agent says you only need to buy benefit periods of 2 or 5 years because of social security ask what the social security benefit will be for you (it will be low). Then find another agent.

Review Policy Exclusions
You may find that certain activities are excluded from your policy - flying in a private jet, scuba diving, skydiving. Make sure your hobbies are not on the list. In your search for coverage be sure you are able to review the actual policy to be issued for you. Each disability policy is a bit different. Be sure you understand what you’re buying.

Non-Cancelable Is Important
A non-cancelable policy is one that can be renewed at the option of the insured at the same guaranteed premium each year.

Some policies are “guaranteed renewable.” They give the policyholder the right to continue the policy in force usually until age 65. The downside is that the insurance company can change the premium.

Select Your Advisor Carefully
Disability insurance is a specialty line of coverage. While almost every agent out there sells the policy, you should be sure of the qualifications of the producer. Interview agents for experience and access to a breadth of markets. Not all individual insurance policies are alike. Not all insurance agents are qualified to provide you with the right disability insurance policy.
Business Overhead Expense Disability Insurance Coverage
This is really a business insurance issue. Doctors, lawyers, and other professionals should consider this disability insurance coverage. It helps defray the expenses of shutting the office down due to disability.

Disability in a Buy/Sell Agreement
Another business insurance issue. If you have a partner who is active in your business, consider disability insurance as a part of the funding of your buy sell agreement. This is in addition the life insurance you are (hopefully) buying.

Bank Loan and Credit Card Disability Coverage
Many banks and credit card companies offer disability coverage as a part of loans. This coverage is sometimes called “credit disability.” The insurance will make your loan payments, should you become disabled. I prefer disability insurance that responds to your complete financial picture, rather than one part - loan payments. The coverage tends to be expensive, too. Buy a policy that protects you and your family's financial life - don’t nibble around the edges.