When we last talked about insurance planning, we focused on life insurance needs. However, we have a few topics left to discuss under the heading of insurance. In this article we will discuss disability insurance.
Disability insurance is very important to anyone who is self employed. Now I know we all feel like we are constantly being hounded about buying more insurance but before you disregard the need for disability insurance, answer the following: Could my family survive for six months to one year if I wasn't able to work? Would I lose my house? Would I lose my business? If the answer to any one of these questions is yes, then you might want to read on.
We tend to understand and accept the need for life insurance. However, odds are that we are far more likely to suffer a disabling injury or illness rather than premature death. In fact, it is 2.3 times higher for a male, age 30. For females, it is much, much higher (typically due to pregnancy complications).
- The average length of a disability for persons age 30 is two years and eight months. However, the average length of a disability for an individual age 50 is just over four years. So, the older you get the longer the disability is likely to last. The likelihood of a disability affecting a business group of 2 to 5 people with an average age under 50 is almost 75 percent. Those are pretty high odds.
Are there other options? Yes, there is social security and worker's compensation. Social security disability insurance (SSDI) is difficult to qualify for and the process is time consuming. To qualify, an individual's disability must last or be expected to last for 12 continuous months or result in death. Additionally the worker must be unable to engage in any other substantial gainful activity, i.e. totally disabled. Worker's compensation does pay short-term disability benefits but the disabling injury must have occurred on the job and if you are self-employed and have no employees, you probably do not have disability insurance.
Typically disability benefits pay about 60 percent of an individual's normal earned income. That is intentional to discourage dishonest folks from trying to make a living on disability income payments.
- There are different types of commercial disability insurance policies:n Group – offered through your employer. It can provide short and/or long term coverage.
Individual – can be funded by an individual or business.
- Short term - typically they cover 13 or 26 weeks but may be as long as two years.
- Long term – provides extended disability coverage for the length of the disability or for the benefit period which could be a few years, to age 65 or for life. Obviously, the longer the benefit period, the more expensive the premium.
Page 2 of 2 - (The tax implications of these various options will not be discussed in this article).
Disability insurance is important in a business partnership as well. Types of policies include:
- Key employee disability insurance – typically purchased by the business to pay benefits for a key employee, should they become disabled.
Business overhead expense insurance – which pays the business
- expenses to include utilities, loan payments, rent, select employee salaries, etc. in case the owner was unable to work and generate income.
- Disability buyout insurance – this insurance would provide funds to buy out a partner if a partner become disabled and unable to continue functioning of the business.
As in any insurance product, the devil is in the details. Key considerations to look for in a disability insurance policy include:
- Definition of disability – some policies require an individual to be totally disabled to pay benefits, like social security. Doctors and other highly skilled professionals typically will purchase a policy with an own occupation definition. That means if a highly skilled professional cannot work in his specific profession, the disability policy pays benefits. Another definition is any occupation. That means so long as you can work, you don't collect disability. Some policies will have own occupation for the first two years and then any occupation thereafter. Obviously, the own occupation definition will drive a higher premium.
- Partial or residual benefits – a good policy should pay partial or residual benefits in case an individual is not able to go back to work on a full-time basis or unable to earn the same level of income they earned prior to the disability.
- Elimination period- this is the waiting period before benefits will be paid. This can range anywhere from 30 to 360 days. The longer the elimination period, the lower the policy premiums will be.
- Benefit period – This can range from as short as 24 months to lifetime benefits.
Previous articles are posted on my web page at http://theretirementexperts.us/. If you would like to comment or make any suggestions, contact me at larrymartin@ theretirementexperts.us or call at 651-4321.
Larry Martin is a registered investment advisor offering advisory services through Main Street Advisor, LLC (MSA). The opinions expressed in these articles may not represent those of MSA. 1407 Main Street, Hays, KS 67601. The Consultants Financial Services, LLC and MSA are not affiliated.