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Disability Insurance:
Keep bringing home the bacon

By Nicolas Valdes-Fauli, CFP®

According to the American Council of Life Insures one in three Americans from the ages of 35-65 will become disabled for more than 90 days. We certainly hope that you are one of the other two Americans but the possibility of becoming disabled is a reality for which we all need to properly plan.

Most individuals see the need for life insurance to protect against the financial loss of a family member and the hardship that ensues. The reality is disability causes roughly 50% of the mortgage foreclosures in this country and only 2% are caused by death. As financial professionals we see clients claim their disability insurance benefits far more often than a surviving spouse or loved one claims life insurance proceeds.

Do you need it?

The first step is to identify who the wage earners in your household are.

The second step is to imagine that each wage earner no longer has an income and potentially increased expenses (doctor’s costs, medicines, therapy, et cetera).

The last step is to imagine the impact this would have on your family and your finances.

It quickly becomes clear that if the entire family relies on a wage earner who is no longer able to provide, the outcome could be catastrophic. In short, if your family depends on your income, you probably need disability insurance.

What types of disability policies are there?

There are generally three types of disability policies with very different definitions of what being disabled means. The definition of disability in the policy is what dictates if your benefit will be paid to you or not. Here are the three primary definitions of disability:

Own Occupation
This type of policy states that an individual can collect their benefits if they are unable to perform the material and substantial duties of their occupation at the time of becoming disabled. A policy holder will also be able to collect even if they continue to work in another capacity. This is generally the best policy and the one we recommend. It is also the most expensive.

Example: A star trial attorney develops a condition which damages his larynx and renders his voice to barley a whisper. Consequently the attorney can no longer stand in front of a judge and jury to plead a case. However, his mind is still perfectly sharp and he begins doing research for other attorneys at his firm. His work is so valuable to the firm that he actually begins to earn more than he was making as a trial attorney. With own occupation disability insurance he would still receive a benefit payout.

Modified Own Occupation
This type of disability policy will pay benefits if you cannot perform the material and substantial duties of your occupation at the time of disability and are not engaged in any other occupation. This policy is okay, but not as good as Own Occupation.

Example: A 35 year old dentist suffers an accident while using one of his woodworking instruments. His right hand is severely damaged and he can no longer perform his duties as a professional. After months of therapy he has regained control of his hand but not sufficient enough to practice again. He decides to return to his alma mater and work as a professor. As soon as he does this, his disability benefit will stop.

Gainful Employment
This type of disability policy states that you will receive benefits if you are unable to perform the material and substantial duties of your occupation, or any occupation for which you are deemed reasonably qualified by training, education or experience. This is the worst type of policy and usually only pays in catastrophic situations. Keep in mind that most corporate sponsored disability plans have this covenant.

Example: A 40 year old world class cellist is involved in an accident which leaves her with 30% of her hearing. Since her ability to interpret music has been greatly hindered she is no longer able to perform as a concert cellist and is forced to retire early from her symphony. Otherwise she is in perfect health and given her experience she can easily work in another position within her field. Gainful employment disability insurance will probably not pay benefits in this situation.

Facts, Stats and Rec’s

• Generally, disability insurance will pay 40-60% of your income until the age of 65.
  
  
• We recommend you purchase your own policy (not paid by your employer) because if you pay the premium costs your benefits will be income tax free.
  
  
• The waiting period (the time between claiming disability and getting your benefit) you choose will greatly impact the cost of your insurance. The most common waiting period is 90 days.
  
  
• Remember, the cost of insurance is directly tied to the caliber of the policy. In this case you definitely pay for what you get.
  
  
• Don’t rely solely on your employer’s plan; it is probably a gainful employment contract.
  
  
• Don’t rely solely on the Social Security administration to cover your disability income. In 2005 roughly 39% of the 2.1 million workers who applied for SSDI benefits were approved.

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