Private disability income insurance is insurance purchased through an insurance company that pays you a predetermined benefit when you are too sick or too injured to work. Private disability income insurance policies come in many forms: individual policies; group insurance policies sponsored by employers, trade associations and organizations; business protection policies; and riders on life insurance policies. More and more private disability policies are being sold as people realize that coverage provided by government-sponsored social insurance programs is limited in scope and often difficult to qualify for.
Individual Policies
An individual disability policy is designed to replace income you will lose if you are too sick or too injured to work. While a group policy covers many people, an individual policy covers just one person: you. As a result, you may pay a higher price for coverage, but you often receive more for your money. You get a policy tailored to meet your needs, more liberal benefits, and guaranteed protection against disability.
Example(s): Maureen was paying $50 a month for a group policy at work that would provide disability benefits to her for two years, beginning after a 30-day waiting period. However, if she quit her job, she would no longer be insured for disability. Since she felt she needed more permanent long-term coverage, Maureen purchased a private disability policy that guaranteed to pay her benefits until age 65, after a 90-day waiting period. Although this coverage cost her twice as much as her group coverage, she felt it was worth the price.
Group Disability Coverage Provided Through an Employer:
Group disability insurance that you purchase through your employer is a low-cost alternative to individual coverage. Here’s how it works: Your employer buys a group disability policy and then offers coverage to you and other eligible members of the group during certain periods of the year (called open enrollment periods). If you enroll at this time, you’ll qualify for coverage even if you are older or have health problems. However, employer-sponsored group plans are not very flexible and may pay limited benefits. Many plans offer only short-term coverage and you may have to meet a stringent definition of disability to receive them.
Group Disability Programs Sponsored by a Trade Association
Trade or professional associations sometimes offer disability coverage to their members. Although called group disability because it is group-sponsored, association policies are issued to individual group members who must prove insurability. However, insurability standards for association members are sometimes relaxed, and you may qualify more easily for association disability insurance than for an individual policy. If you buy an association-sponsored policy, it will initially cost less than an individual policy. However, after a certain term (5 or 10 years), your premium may rise and eventually exceed an individual policy rate. In addition, the policy will be canceled if you leave the group or if the association withdraws its endorsement, leaving you without disability protection.
Example(s): Hans bought an inexpensive group disability policy through the Michigan Tulip Growers Association. However, when he was barred from membership in the group after importing illegal bulbs from Mexico, his disability policy was canceled, leaving him without coverage.
Specialized Policies
You can purchase a group policy that provides limited coverage in specific circumstances. Credit disability insurance (a policy that will make payments to a specific creditor, should you become disabled), accident-only insurance, long-term care (LTC) insurance, and limited health insurance all pay disability benefits in specialized circumstances. Some of these policies (such as credit disability insurance) are group policies issued through organizations and institutions. Others (such as LTC insurance) are individual policies purchased through an insurance company.
Example(s): When Lenny took out a car loan, the bank manager sold him a credit disability insurance policy. The cost of the policy was added into his loan and increased his car payment by $2 per month. When Lenny was disabled in a skiing accident, his insurance company made his car payment for him until he was able to return to work.
Business Protection Policies
If you own a business, you can purchase disability insurance that will protect your business if you or one of your employees becomes disabled. You can purchase insurance to protect your business in one or more of the following areas: long-term disability (LTD) plans, salary continuation plans, key person disability insurance, business overhead expense policies, and disability buy-out plans. Although some of the terminology explained in this document applies to business disability policies as well as individual and group policies, business protection policies contain terms and provisions unrelated to most individual and group policies.
Disability Income Riders Attached to Life Insurance Policies
Some people purchase limited disability insurance by attaching a rider to their life insurance policy. This rider guarantees the insured a regular monthly benefit payment in the event he or she becomes permanently and totally disabled. The amount of benefit payment depends on the face value of the life insurance policy.
Example(s): Angie buys a life insurance policy with a face value of $50,000. She adds a disability income rider to it that guarantees that she will receive $10 per month per $1,000 in life insurance coverage. Thus, if she becomes disabled, she will receive a $500 per month disability benefit payment.
Next week, we’ll discuss who can purchase private disability insurance. If you have questions, contact the Experts at Henssler Financial: experts@henssler.com or 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
