Disability Insurance
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Quick Facts on Disability Insurance
By: Tony Novak
§The sole purpose of individual disability
insurance is to replace your after-tax income in the event of an
accident or illness. These policies do not provide protection from
medical expenses or recovery of damages for “pain and suffering”.
§Since the benefit payments are designed
to be income tax-free, insurance coverage in the amount of 2/3 of
your salary is roughly equivalent replacing your net take-home pay.
This is usually the maximum amount of insurance that you can purchase.
§Be prepared to show the insurance company
a pay-stub if you are salaried or an income tax return if you are
self-employed to prove the amount of insurable income.
§If you are self-employed, you can only
insure the amount of net income that you reported on your tax return,
even though your actual earnings might be much higher. In this case,
you might want to supplement your insurance with “business
overhead coverage” that does not depend on net income.
§Expect the insurance policy to exclude
or limit coverage for pre-existing conditions. If you have a bad
knee, for example, expect that your policy might have a 5 year rider
on claims due to knee injuries.
§Most policies are issued for a term
of five years of coverage, although you can buy a longer or shorter
benefit amount.
§Most policies have a 90 day waiting
period before you can begin collecting a benefit, but you can buy
longer or shorter waiting periods.
§Most policies integrate with Social
Security disability insurance. This means that the total amount
of the benefit you collect will not exceed your net after-tax income
before you were disabled.
§Most policies may be continued year
after year until you retire. But the average life of a disability
insurance policy is about 5 years.
§The average time required for an insurer
to review an application is about 3 weeks. The insurer may request
copies of medical and financial records.
§Applications are still submitted on
paper; no online enrollment system is available.
§Expect the premium cost to be about
2% of your salary if you have a “desk job” and about
4% of your salary if you work with your hands. Of course, this is
a very rough guideline, and the actual cost will depend on a greater
number of individual factors.
§When a policy is issued, you have at
least 10 days to review all of the details and cancel the coverage
if you are not completely satisfied. It may be useful to have an
independent financial adviser review the new policy during this
period.
§Assuming that you keep disability insurance
for the balance of your working career, the probability of suffering
a loss of income due to accident or illness sufficient to trigger
a claim under your policy is about 1 in 4.
§If you become disabled, you should
consult with an attorney who specialized in disability insurance
claims before filing a claim with the insurer. This may help avoid
delays and disputes regarding the claim.
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Insurance Information here
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