Part 2 – Disability Insurance: What is it?

Disability insurance replaces a percentage of your income if you become disabled and unable to work. You typically pay monthly premiums based on age, gender, occupation and income, with the policies usually guaranteeing between 50 percent and 70 percent of your income. There is a period of time that you must be disabled before the policy pays benefits. This period varies from plan to plan but is generally around 60 days.

DISABILITY – Because of injury or illness, unable to work:

• At your job
• At any job
• At any job for pay
• At a job for which you are suited by training, education or experience
• Combinations of the above

UNDER THE CARE OF A PHYSICIAN –

• Being seen by a physician
• Being treated by a physician
• Physician not related to you
• Being seen for injury or illness that resulted in disability

ELIMINATION PERIOD – Time you must be disabled before benefits begin.

BENEFIT PERIOD – Length of time benefits will be paid as long as definition of disability is met.

RESIDUAL DISABILITY – Provides benefits for loss of income after recovery.

REGULAR OCCUPATION – Defines job that you are unable to perform as your regular job.

Specialized Riders

Social Insurance — Pays benefits if insured has applied for social insurance benefits and been denied (e.g., Social Security).
Additional Monthly Benefits — Pays benefits from end of elimination period for the balance of one year.
Cost of Living — During disability, increases benefits by pre-selected percentage usually to a stated maximum.
Future Purchase Option — Allows purchase of additional benefits based solely on increased income.
Return of Premium — Using a stated formula, refunds some percentage of premiums paid to policy owner at the end of a stated period of time.

Under some disability insurance policies, you are either considered able, or not able, to work. While under others, your ability to work reduced hours or at a different job is considered when determining your coverage eligibility. To allow you the possibility of working part-time or from home before you are completely recovered and receiving both partial salary and partial disability payment, you can choose to purchase add-ons, or riders. These riders can add 20 percent to the cost of a policy, but they afford important flexibility you may very well want.

Considerations When Purchasing Disability Insurance Coverage

Here are some important things to keep in mind about disability insurance coverage:

• If you find that disability insurance coverage provided by your employer does not meet your needs, see if you can trade your disability coverage for cash so you can purchase your own plan. This would offer two major advantages: your coverage would be complete under one plan, and any benefits you receive would be tax-free.
• Your disability insurance company can only cancel disability policies that are “guaranteed renewable” if you fail to pay your premium.
• The premiums for “non-cancelable” disability policies can never be raised.
• Remember to investigate the impact of other payments (social security, for example) on your disability insurance policy 

COST EFFECTIVENESS OF RETURN OF PREMIUM RIDERS
Example:10-YEAR RETURN OF PREMIUM RIDER
Structure

• At end of 10 years, take (sum of premiums – dividends – claims) and refund 80% of result.
• Since refund less than premiums paid, no 1099 generated.

Options With Refund

• Take in cash.
• Leave on deposit.
• Use to pay future premiums.