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Disability Awareness Month – Do You Know The Definitions?

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For most people, their biggest financial asset is not their home, but rather their ability to work for an income. Yet while the vast majority of people insure homes, vehicles, and personal possessions, only a few insure against losing the ability to earn a living.

Thankfully, a solution is available. Disability insurance is designed to replace part of earnings if the insured person is unable to work because of accident or illness. The risk of disability may be higher than you think. About 30% of today’s 20-year-olds will become disabled before they retire, according to the Social Security Administration.

When digging into disability insurance options, it is important to look at the following areas to ensure you have the best coverage for your unique situation:

Definition of disability – Carefully read how the policy describes disability. Some policies pay only if you are unable to work at any occupation, while others will pay benefits if you cannot perform your normal occupation.

Benefit period – The policy will state how long you will receive monthly benefits if disabled. The best choice is a policy that pays until age 65. After that, Social Security disability should be able to provide financial support. A typical short-term disability policy will pay benefits for three to six months.

Percentage of income replacement – Disability insurance is not designed to replace all of the insured’s income. Most coverage will replace 50% to 60% of pre-disability income, although some go as high as 80%. Employers typically want to limit the amount of coverage in an effort to encourage employees to return to work and generally offer closer to 50%.

Are both accidents and illness covered? – Some policies exclude illness as a cause of disability, and this limitation results in coverage that is less expensive. However, illness is more likely to cause a disability than an accident. This is a key area of focus when reading through a policy’s details.

Waiting period – A policy will not begin paying until the insured has been unable to work for a certain period. This also may be called the elimination period. A typical waiting period is 60 to 90 days. Shorter waiting periods result in higher premiums because benefits start sooner.

Non-cancelable and guaranteed renewable policy – Most reputable insurers offer policies that cannot be canceled and are automatically renewed as long as premiums are paid on time. You should always check for this language because it is crucial to any good disability insurance policy.

Future Purchase Options – For a slightly higher rate, a policy with a future purchase option allows you to increase coverage as your wages rise without taking another physical or rewriting the policy.

Business overhead expense coverage – If you own a business or incur significant business expenses that do not come out of your regular paycheck, you may want to insure against overhead costs in addition to covering lost income. Without this kind of policy you may see your paycheck protected but lose the funding for your business expenses. Typically, anything that is tax deductible under business expenses will be covered by overhead insurance.

Cost of living adjustments – If you are disabled for five years or more, it may be difficult to keep up with the bills if your payout is fixed but your expenses keep rising due to inflation. Check any long-term plan to see whether payments are indexed to inflation in the event of a claim.

There are many components to consider when researching disability insurance options. We are here to help you sort through the details in order to create a comprehensive insurance strategy.

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