Published July 2004

Protect your income with disability insurance

You probably don’t think twice about the need for life insurance. After all, if something were to happen to you, you’d certainly want your family to be taken care of financially. But like many people, you may be overlooking disability insurance — and that could be a costly mistake.

Of course, if you’re healthy, and you work in a job that isn’t physically risky, you might initially scoff at the thought of disability insurance. Before you dismiss the issue, you may want to consider these statistics:

• A 20-year-old has a 30 percent chance of becoming disabled before reaching retirement age, according to the Social Security Administration.
• A 35-year-old is six times more likely to become disabled than to die before reaching age 65, according to the American Council of Life Insurers. Furthermore, a 35-year-old who is disabled for 90 days is likely to remain disabled for an average of three years.

These numbers suggest a strong need to help protect yourself and your family. Remember, you don’t have to be involved in an accident to become disabled; a serious illness can also “put you down” for an extended period. And even a brief disability, with its consequent disruption of your income, could seriously harm your financial stability and your progress toward your financial goals.

There are two basic types of disability coverage: short term and long term. Short-term disability provides income for the early part of a disability — anywhere from two weeks to two years, depending on the policy. Long-term disability can replace income for a set time period — such as five years — or until you turn 65.

Both short- and long-term disability policies usually will pay anywhere from 50 percent to 66 percent of your salary. If you pay your own premiums, your disability benefits are typically tax free. But if your employer pays your premiums (usually with pre-tax dollars) disability benefits received will generally be taxable.

Employers generally provide short-term disability coverage as a standard benefit, but long-term disability may be optional, if offered at all. You should become familiar with the disability coverage offered by your employer. If your employer offers you short-term disability coverage as part of a group plan, take it.

To supplement your group coverage, you may want to consider buying an individual long-term disability policy. Here are some of the key questions to ask:

• How is disability defined? Some policies will only pay benefits if you can’t do your normal job; other policies pay if you can’t work at all. Also, some policies require that you be totally disabled before you receive payments, while other policies pay for partial disabilities. A top-of-the-line policy will feature income replacement for your occupation. These types of policies may not be canceled and are guaranteed to be renewed. That means the company cannot change definitions, benefits or revoke the coverage once it’s in place, assuming all premiums are paid on time.
• When do payments begin? Typically, you can choose to start receiving disability payments from 31 days to the first six months after you become disabled. The longer you wait to start receiving payments, the lower your premiums will be.
• How long is the coverage? Long-term disability policies generally pay for two years, five years or until you turn 65. The longer you receive payments, the higher your premiums.
• Is the policy inflation adjusted? You can add a cost-of-living adjustment — which typically increases payouts by 4 to 10 percent each year — to your policy.
• Do I have to pay premiums if I become disabled? Look for a policy that offers a “waiver of premium,” which frees you from paying premiums if you’re disabled for 90 days or longer.

By evaluating your disability income needs with your financial professional, and by finding the right coverage for your particular situation, you can help protect your family from the devastating effects of an income-threatening injury or illness. If you don’t already have this protection in place, I recommend adding it to your financial plan. Soon.

Eric Cumley is an investment representative with Edward Jones Investments at 1201-C SE Everett Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 9,000 offices nationwide.

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