Kim C. Christensen                                                              
 
Certified Financial Planner    
Registered Investment Adviser        
Registered Investment Advisor
Disability Insurance

Disability insurance is one of the most overlooked and least-understood areas of risk management.  The key question to ask yourself is whether or not you or your business could pay the bills if you or one of your key employees were not able to work.  In the case of businesses, you should also ask how you would pay to buy out an owner's interest in the business if they were not able to work.  If you do not come up with an answer to the problem (cash to cover the shortfall), disability insurance is probably the solution.

Kinds of Disability Insurance

Personal disability insurance replaces part of your income if you are unable to work, or only do some of your duties.

Key-person disability insurance provides cash to a business if a key-person is unable to work, or only do some of their duties.

Buy-out insurance provides funds to buy out a co-owner's interest in the business of they are unable to work.

Overhead insurance provides cash when an owner is disabled and unable to work.  Funds are provided to basically keep the doors open, the lights on, and the employees paid while the owner either recuperates, or sells the business.  It buys time for the owner so that their business does not fall apart while they are out, or not have to sell the business for fire-sale terms.

Sources of Disability Insurance

Employer group plans cover all eligible employees, and are often provided by the employer.  Generally do not have as many benefits and features as individually purchased policies.  For larger plans, medical underwriting may not be required.  Generally less expensive than individually purchased policies.

Employer multi-life plans cover specific individuals in a company, and are usually individually underwritten.  Available benefits and features are the same as individually purchased plans, generally require full underwriting, but provide a discount, which can be significant for females in the organization.   Generally less expensive than individually purchased policies.

Association plans are available to members of a group, such as the American Medical Association.  Generally do not have as many benefits and features as individually purchased policies, and they often are not guaranteed plans, that is, they can be canceled or premiums can be raised for the group.   Generally less expensive than individually purchased policies.

Individually purchased policies generally have the strongest benefits and features, and usually cannot be canceled by the insurance company.  If the are non-cancelable guaranteed renewable, the premiums cannot be raised above the illustrated premiums either.  Generally the most expensive policies, but with the best benefits and features.

KEY POLICY FEATURES

Definition of Disability
  (Definition names may vary, and terms may vary, but the principles are the same.)

Own Occupation - The insured receives a benefit if they are unable to perform any of the principle duties of the occupation they were doing at the time of their disability.  (The strongest definition.)

Modified Own Occupation - The insured receives a benefit if they are unable to perform any of the principle duties of the occupation they were doing at the time of their disability, and they are not gainfully employed in any other occupation.

Any Occupation  - The insured receives a benefit if they are unable to perform any occupation that they are qualified for based on the training, education and experience.  (The weakest definition.)

Frequent Misunderstandings About These Definitions

These definitions are often very misunderstood by consumers.  For instance, physicians often think that if they do not have "own occupation" coverage, they will be forced to do something else if they are not able to do their own job.  That is certainly not true for modified own occupation, as it gives the choice about working in another occupation to the insured - they do not have to do something else if they do not want to do it, and they will be paid the benefit.  If they choose to do something else, they may be paid a proportional benefit based on the loss of income from their previous occupation.  Beware of agents trying to convince you that you will not be covered if you do not get true "own occupation" coverage, especially if they are competing with a captive company whose products they cannot sell.  (If they do not get you to buy their product, they do not get paid.)

It is rare that a person is able to work in another occupation but not in their own occupation.  It probably happens between 1% to 3% of the time.  It is FAR more likely that a person will either be totally disabled, or partially disabled.  In the case of partial disability, it does not matter if the definition is own occupation or modified own occupation, both policies will work the same way.

The most important thing is that you are working with a company that will treat you fairly and has the financial strength  pay a legitimate claim, and keep on paying it as long as you qualify for the benefit.

Residual/Partial Disability

If you are able to do some of the regular duties of your occupation, or do them but not full-time, you will probably qualify for a residual benefit.  In most cases it will be a proportionate benefit based on your loss of income.  For instance, if you have a benefit that is $5,000 per month and you are only able to earn half of your pre-disability income, it will pay $2,500 per month. 

Be aware that just because you are disabled and not able to work, you may still have income coming in from accounts receivable, insurance claims pending (in the case of physician practices), etc.  Most companies look for your income to drop, including these payments.  If you can find a company that only considers lost time during the initial period of disability, say the first six months, that is even better.

The best individual policies will provide a partial benefit if you are only partially disabled at the beginning of your disability, and never become totally disabled.   Many group and association plans require that you first qualify for a total disability benefit before you can qualify for a partial disability benefit.

Non-Cancelable Guaranteed Renewable vs. Guaranteed Renewable

These are confusing terms.  Non-cancelable guaranteed renewable means the premiums are guaranteed to never increase above what was agreed when you bought the policy and the policy can never be canceled by the insurance  company.  Guaranteed renewable means that the policy can never be canceled by the insurance company, but the premiums  are not guaranteed.  They could be raised above what was agreed when the policy was purchased, but if that happens, they have to be raised for the entire class who bought those policies, and they cannot single you out for an increase.

Most companies only offer non-cancelable guaranteed renewable policies.  Some offer guaranteed renewable policies, and the premium will be lower for them.  If that is an option and you want to minimize the premium, it might be a good option.  You need to evaluate the quality and history of the company (have there been rate increases in the past, for instance), and also whether or not the company pays dividends.  It is possible that a dividend-paying company might actually be the better value in the long run if it pays higher dividends on the non-cancelable policy.

Presumptive Total Disability

There are certain disability that are considered to make you totally disabled, whether or not you can actually work.  In those cases, the company pays the benefit as long as the presumptive total disability exists, whether or not you are working in your own occupation, and no matter how much you might be making in your occupation.  Presumptive total disabilities include the loss of the use of both feet, hands, a foot and hand, eyesight, hearing, or speech.  Most companies will only pay the benefit until the end of the benefit period, often age 65.  There is at least one company that will pay the benefit for your entire lifetime.

Inflation Protection

It is a good idea to include inflation protection in a policy.  If you were to be disabled for a long period of time and your benefits did not increase with the cost of living, you could see significant erosion of your purchasing power, and your standard of living.  This benefit is expensive, but would be worth it if you ever had a long-term claim.

Policies often give you a choice of maximum inflation benefit, such as 3% versus 6% per year.  The higher the percentage, the higher the premium.  If you are comparing policies/companies, make sure you are comparing the same rate.

Note that many group benefit and association plans to not include inflation protection in their policies.  That is one reason that their premiums are be lower.

Other Options

There are many other bells and whistles that you can add or remove from a disability policy, and they are beyond the scope of this web page.  If you want to learn more, call me.

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