What If You Can't Work?

Most people build a solid nest of insurance, papering it with policies on their life, health, home, and car. But many fail to protect what enabled them to buy all that coverage in the first place: their income. Disability, or "lifestyle," insurance ensures that if you become disabled for a long stretch, you won't be hit with a sharp drop in income as well. While your employer may provide some long-term coverage, it's often not enough and--given the prodigious amount of jargon used--not well-understood.

"Disability is the most overlooked coverage there is," says Steven Ross, a financial planner with IDS Financial Services in Arlington Heights, Ill. For someone aged 35 to 65, the chances of being unable to work for 90 days or longer because of a disabling injury or illness are about equal to those of dying, says the Health Insurance Assn. of America. And many more homeowners face mortgage foreclosure because of disability than because of death. Yet people are far more likely to buy life insurance than disability coverage.

MONTHLY CAP. Most medium and large companies offer employees some form of short- and long-term disability coverage. In a typical long-term plan, an employer will pay 50% to 60% of the pretax salary--but will cap monthly payments around $5,500. That means anyone earning into the six figures may find the income from their company's group plan inadequate.

A company's short-term disability plan usually provides 70% to 80% of pay up to 13 or 26 weeks. The typical waiting, or "elimination," period between the end of short-term and the start of long-term benefits is six months. And since you won't receive a check until a month after that, you'll have to cover seven months' expenses out of personal savings and other benefits.

If your employer shoulders the premiums, any payments you receive are taxable. If you foot the bill, you're paying with aftertax dollars, but the benefits are tax-free. "People ought to assess whether it's worth paying the premiums themselves, which may amount to 0.4% to 0.6% of their pay, or having an employer pay, but being taxed on the benefits," says Barry Schilmeister, a consultant in the New York office of benefits consultants Towers Perrin. In a group plan, where you have no say in plan design, you may not have a choice. In flexible, "cafeteria" benefit plans, however, you may have payment options.

STRICT DEFINITION. Before you can determine if you have enough disability coverage, you need to figure out what your expenses would be if you were unable to work. Once you determine what you could live on comfortably, evaluate what other benefits might kick in. This may include disability payments from a defined-benefit pension plan or payments from Social Security. But Social Security definitions of disability are so stringent that "we suggest that people don't count on it," says Steven Weinstein, a partner with Arthur Andersen in Chicago.

The first question to ask about a plan is what definition of disability is being used. "Own occupation" or "regular occupation" policies consider you disabled and eligible for benefits if you cannot work in your own occupation. "Any occupation" policies consider someone disabled if they cannot perform any work for which they are qualified by "education, training, or experience." Group policies often provide "own occupation" coverage for the first year or two of disability and then switch to "any." You can buy individual policies that stipulate "own" until age 65, or for life, but the cost may be prohibitive. You can also buy policies that pay benefits for 1 year, 5 years, or 10 years.

Another important consideration is whether your policy requires that you be totally disabled before you qualify for benefits. "Often, as long as people are partially disabled, they are not eligible for benefits," says Jill Madison, a principal with benefits consultants William M. Mercer. "Some employers are starting to look at that issue, especially in California with AIDS. People may not be able to work every day, but they're often not totally disabled."

BUILT-IN SHORTFALL. If you don't think your company's coverage is enough, you may be able to buy supplemental coverage through your company plan. "The cost is probably 50% less than you'd pay buying it on the outside," says Madison. The cost ranges from 20~ to 39~ for each $100 of additional coverage. While you may be able to protect another 20% or so of your income this way, it's unlikely that you'll ever be insured for more than 80% of your income. "Insurers don't want you to end up being paid more on disability than when you are being an income-producing member of society," says Connie Chen, president of Chen Planning Consultants in New York. If your employer doesn't offer supplemental coverage, a professional association may.

One big drawback to group policies: You can't take them with you if you leave your company. For a partial safeguard against that, or just as a supplement to a group policy, consider an individual disability policy. "Many highly paid people like this as a security measure," says Schilmeister. "They say at least it's a fall-back."

Individual policies, while far more expensive than group coverage, can pay monthly benefits as high as $25,000. And they have more liberal definitions. Most are noncancelable, meaning that as long as you pay your premiums the policy can't be canceled, regardless of your health.

A policy that you buy on your own may also have a partial, or "residual," disability provision built in or available at extra cost. So if you return to work partially disabled and can't work every day, or have to take a lower-paying position, the policy will fund the shortfall, usually if your drop in income is 20% or more. That can be important for owners of small enterprises who can't go prospecting for business. One snag is that you have to qualify for this coverage, and if you have a preexisting condition, you may run into problems.

While the features offered in basic policies differ among insurers, the high cost is a constant. Consider a 40-year-old nonsmoking executive who wants to receive full benefits if unable to return to his or her occupation. With a salary of $100,000 a year, the executive might pay a monthly premium of $145 for a policy that replaces almost 60% of salary, to the tune of $4,700 a month, according to Provident Life & Accident Insurance. In this example, the executive has to be disabled for 90 days before the policy kicks in, and the policy will run to age 65.

BUY YOUNG. The longer you wait to buy a policy, the more expensive it will be. Insurance companies increase the premiums about 4% a year until about age 50, when premiums can jump 7% to 10%, says IDS' Ross. So it pays to buy young. If you purchase a policy at age 35, for example, when premiums are less expensive, you're locking into that lower price.

If you buy a policy on your own, you'll be faced with a bewildering array of add-on options, or riders. Most are costly. They include cost-of-living adjustment (COLA) riders, which may increase potential payouts by a set percentage each year or track the actual increase in the cost-of-living index. Future purchase options are also offered, allowing you to buy additional coverage on your policy even though your health may have declined. (For more information, write the Health Insurance Assn. of America, P. O. Box 41455, Washington, D. C., 20018, for a free booklet, The Consumer's Guide to Disability Insurance.)

Of course, choosing a top-quality insurer is the first step in shopping for coverage. What you're buying is a promise to pay--and you can't afford to have that promise broken if you become disabled.


Find out how your insurer defines disability. Will you be eligible for benefits if you can't work in your occupation only, or must you be unable to work in any field for which you are qualified by "education, training, or experience"

Check whether you must be totally disabled before benefits begin. Some policies provide benefits for partial disability--if you can't work every day, for example--but usually only if it follows a period of total disability for the same cause

Make sure the policy covers you for sickness, not just accidents. You are more likely to need disability coverage for illness than for injury, especially after age 50

Be sure an individual policy is noncancellable. That means that as long as you pay your premiums, the policy cannot be cancelled, regardless of any decline in your health


    Before it's here, it's on the Bloomberg Terminal.