Disability insurance is often overlooked when investors put together their
financial plans. Many include other risk management strategies, such as life
insurance, but do not realize how devastating an illness or injury could be
to their financial health. Disability insurance will help you maintain your
income when a qualifying disability, such as illness or injury, leaves you
unable to work. Studies show that we are more likely to have life insurance
than disability insurance; yet the chance of experiencing a long-term
disability is much greater than the chance of dying before age 65.

 
Factors in a Policy
 
Several factors affect the price and effectiveness of disability insurance.

The amount of coverage you select will play the greatest part in your
policy’s pricing. You can elect what percentage of your income will be
protected by the policy up to a certain limit. Depending on your occupation
and earnings, most policies will cover a maximum of 65% of your gross income
with a monthly benefit ceiling of $15,000. The definition of income can vary
widely by policy. Some do not consider bonuses, overtime or commissions to
be income. Depending on your profession, this could dramatically affect your
benefit.

 
There are also different types of disability classifications: own occupation
or any occupation. Own occupation will pay when you are unable to perform
your existing profession. Any occupation will only pay when you are unable
to perform any job that your training and education have prepared you for.
Own occupation coverage allows you more flexibility. You may be able to work
part time at a local bookstore and still be paid your benefit if you are
unable to work at your previous career.

 
You may want to consider residual benefits, which will pay you the
difference between a part-time income and your former income. This way if
you are able to work at your previous occupation part time, you would still
be eligible for some benefits from your insurance policy. Other appealing
options include non-cancelable and guaranteed renewable provisions. With
guaranteed renewable policies, the coverage cannot be changed or canceled;
premiums, however, can be raised. These premium increases can only occur if
the premiums are raised for an entire class, for example all people in your
age group. Non-cancelable policies cannot be changed unless you request the
change.

 
Other factors that affect disability insurance pricing include the waiting
period and the benefit period. The waiting period is the period between the
onset of your disability and when the policy begins paying you. The benefit
period determines how long the policy will pay your benefit. You can elect a
stated period, such as two years, or to a certain age, such as until age 65.

 
If you are still early in your career, you may want the option of increasing
coverage down the road – when your income could be substantially higher. To
have this option available to you, you should consider adding a future
insurance option to your policy. This option allows you to purchase more
insurance without having a medical exam.

 
Disability insurance can be an important risk management tool in your
overall financial plan. Be sure to consult a trusted financial professional
to help determine the coverage that will best fit your personal financial
needs.

 


 

C. David Petrucci, CFP®, is an Associate Vice-President-Investments and
Wealth Management Specialist with Legg Mason Wood Walker, Inc., a
diversified securities brokerage and financial services firm that is a
member of the New York Stock Exchange, Inc. and SIPC.
800.634.0072
cdpetrucci@leggmason.com
www.davidpetrucci.com

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