Ok, so you’ve got your basic term life insurance in place (maybe you’ll convert some of it to permanent later or maybe you’ll just save on the side… it’s all good). You’ve got your major medical in place. Then… Bang! You get clobbered by a sickness or injury. It could be a severely hurt spine or neck. It could be a broken leg. It could be cancer (even if you’re young, cancers like leukemia, cervical and ovarian cancers, testicular cancers and melanomas are still quite common for people in their 20s and 30s). It could be multiple sclerosis – which also frequently has an onset in age 20-30.
Indeed, if you are below about age 50, the chances of you encountering a significant long term disability that disrupts your ability to earn a living is much greater than your chances of dying. Yet so many middle class people – the very class that relies the most on income from work – go without disability insurance coverage or are significantly underinsured.
Who pays you?
Look at disability insurance in the context of all your other coverages and risks: If you get sick or hurt, you have medical insurance. They pay the hospital. But if you have a significant medical issue – big enough to blow your insurance deductible, chances are good you’re going to be out of work for a while. And you may even need ongoing medical care – especially for chronic, rather than acute conditions.
When you can’t earn a living, who pays your rent or mortgage? Who pays your light bill? Who puts food on your table for yourself and your children? Let’s put an even finer point on it: Who pays your medical insurance premiums?
To take it further, what happens when you can’t work – or you lose your job because of your disability, and you can’t continue your medical insurance premiums?
Why, you get cancelled for non-payment.
And under federal law (HIPAA), unless you can find new coverage within 63 days, congratulations, you are now shopping for insurance with a pre-existing condition. Which will limit coverage for the precise treatments you need most for a year.
That’s why the vast majority of families need some disability insurance protection – whether they get it from their employer (benefits taxable to the worker) or buy it themselves (benefits usually tax-free): Disability insurance prevents medical setbacks from cascading into a series of other insurmountable financial problems for you and your family, and buys you time to recover, and perhaps retrain for another trade or profession.
Think of it this way: Life insurance pays your spouse and children. Medical insurance pays your doctor. Long term care insurance pays the nursing home. Only disability insurance pays you!
What disability insurance provides
Disability insurance (the agents usually call it “DI,” for short”) is designed to replace a portion of your income if you get sick or hurt. Typically, DI carriers will be willing to underwrite a benefit of between 50 percent and 65 percent of your pre-disability income. Hopefully that’s high enough to at least keep you in your home and keep the lights on, while still providing you an incentive to recover quickly and get back to the work force as soon as possible.
Disability insurers can’t pay much more than that, because no system of insurance can last long if customers would rather watch TV at home and collect benefits than go to work. That’s what we have welfare for. (I kid!! I kid!!!!!).
How To Buy It
Disability insurance, like other insurance policies, is a contract. As such, the specific language in the contract makes all the difference. Think of it: Life insurance is easy. In 99.99 percent of cases, either you’re dead or you’re not. Except for some possible exclusions at the margins (acts of war on some policies, death while committing a felony, or death while motorcycle racing when you wrote on your application less than 2 years ago that you didn’t race motorcycles), the payout of life insurance benefits is very clear cut.
But how do you define “disability,” and how do you determine, in iffy cases, where the injury or illness warrants paying a claim?
Take a look at your policy, or have an agent explain the policies they sell. Look at the specific definition of disability in the policy. There are two kinds of coverages: “own occupation” and “any occupation.”
“Own occ” policies pay out benefits if the injury or illness prevents you from working in your own occupation. “Any occ” policies pay benefits only if your condition prevents you from working in any occupation for which you are reasonably suited, given your employment history and educational background.
The one you want is “own occ.” That’s the one pays benefits under the widest variety of circumstances. But nothing in insurance is free… those policies pay more claims, so you pay a bit more in premiums.
Here’s what to be aware of: If you get disability insurance from your employer, it’s almost always “any occ.” Show a company two options for employee benefits and they will almost always pick the cheaper of the two options when they’re the ones paying the premium.
If you’re self-employed or the owner of your own business, you’ll probably want to invest in the “own occ” version. You don’t typically get “workers compensation” unless you specifically structure things so you are the owner-employee of your own corporation, so it’s DI or nothing for you. But underwriters take a hard look at your profession. They all want to underwrite lawyers and accountants, and few of them are eager to write policies for roofers and electricians. Premiums for blue-collar professions are much higher than for the white collar ones – simply because the blue-collar folks get hurt more. Even the owners get hurt more on the job than accountants.
Each company underwrites different occupations differently. For that reason, I believe the best way to look for individual disability insurance is to go through a broker who specializes in disability coverage, and who will shop your occupation out to many different companies at once. Different companies will underwrite your profession very differently and come up with very different rates. Using a broker maximizes your chances of making something close to the optimal choice.
That said, there are some excellent proprietary products sold through captive agent channels. You can do well with these as a white collar-type professional. If you work with your hands, you’re probably better off going through a disability brokerage.