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Disabili​ty: When the Paycheck Stops ...

January 18, 2007
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What would happen if your paycheck suddenly stopped because you were ill or injured and couldn't work? Could you pay your mortgage and monthly bills?

You could if you had long-term disability insurance, reports the Pennsylvania Institute of Certified Public Accountants.

Disability insurance provides monthly income when you're disabled and unable to work. Without coverage, a disability can deplete your savings or drive you into serious debt.

You may already have some disability coverage through your employer, but it may not be enough. Benefits provided by employers typically cover only 50 percent of your income up to a certain monthly maximum (which may be less than 50 percent for highly compensated employees).

You cannot count on Social Security either. Social Security disability replaces only a limited portion of your salary, and it's very difficult to qualify. Generally speaking, you must have been disabled for at least five months, and have a disability that is expected to last at least one year or end in death.

Additionally, you must be unable to be gainfully employed in any occupation, not just the occupation you worked in at the time your disability began.

There are several types of disability policies available with features that make it possible to tailor coverage to fit your needs. To select the best policy just for you, consider the following scenarios:

Definition Important

The most important consideration is how your policy defines disability. The best policies pay benefits if you are unable to perform the major duties of your own occupation, even if you can do some other tasks. Other policies pay only if you cannot perform the duties of any occupation for which you are reasonably qualified by training, experience or education.

All long-term disability plans have an elimination period before benefits are paid. An elimination period is similar to the deductible for medical and car insurance. The most common waiting period is 90 days, but you can select a policy that doesn't pay until you've been disabled for 180, 365 or 730 days. The longer the elimination period, the lower the premium.

With most policies, you can select to receive benefits for a specified period of time, such as two years, five years or until retirement age. The shorter the benefit period, the less expensive the policy.

If you can afford it, it's best to purchase a policy that provides benefits until retirement age.

Disability insurance is designed to pay you enough to cover the basics, but not enough to keep you from returning to work as soon as possible.

To determine the percentage of income you want to replace, compute how much you would need each month to cover your monthly expenses.

Keep in mind that while some work-related expenses may be lower, you could be paying more for medical expenses. On the plus side, unlike a group plan, benefits from a personal disability policy are generally tax-free.

Under a noncancelable contract, once you have been approved, the company cannot cancel your policy or raise your premiums. With a guaranteed renewable policy, your policy cannot be canceled as long as you pay the premiums, but the insurer can raise your premiums as long as the change affects an entire class of policyholders and doesn't single you out.

While the price for a noncancelable policy is higher, it's the best option as it locks in your rates and benefits.

With all the options available, it's best to select a personal disability policy within the context of your overall financial plan. 

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