Ouch! Don't Forget Disability Insurance:
Broken leg? Bad back?
A disability policy keeps
your finances above water if you can't work.
By: Annelena Lobb
CNN/Money, NY (Updated March 2004) - Buying disability
insurance probably ranks low on your financial
to-do list. After all, if you're young and healthy
and you work at a desk job, what are the odds
you're going to need it?
Well, you might not think of a broken bone, a
problem pregnancy or an anxiety condition as
disabling, but all of them could keep you out of
work. About 30 percent of Americans age 35 to 65
will suffer a disability lasting at least 90 days
sometime during their careers, according to the
Health Insurance Association of America.
Should you ever need the protection a
disability policy can offer, you'll be glad you
took financial precautions. Without coverage, an
unexpected disability can easily drive you into
"Unless you're independently wealthy, you need
insurance if you stand a chance to lose your
income because of a disability," said David Woods,
president of the Life and Health Insurance
Foundation for Education.
Getting the right policy isn't easy. Prices
vary widely, and only a handful of the big
insurers even offer disability policies, said
Steve Crawford, a spokesman for Guardian
Do you need it?
"Most people say, I don't need disability
coverage -- I've already got it through work,"
said Crawford. But most company-issued disability
insurance only provides you with 60 percent of
your salary and sets a monthly maximum of $5,000
to $10,000, which can be even less than 60 percent
of a highly compensated employee's salary.
But here's the problem: Those benefits are also
fully taxable, which means you're actually getting
a lot less than 60 percent of what you're used to.
"You could easily find yourself trying to
survive on about 40 percent of your salary -- or
less, if you're a high wage earner -- if you don't
buy a supplemental policy," Crawford said.
And Social Security probably won't cover you,
either -- Social Security disability benefits are
one of the most difficult benefits to qualify for,
Crawford said. "You have to be completely disabled
for at least a year, with no hope of recovery," he
said. "Even when you meet those requirements,
you're unlikely to receive more than $2,000 a
Shopping for policies that
make the grade
Look for company strength. The first
question you need to ask is whether the insurance
company you're eyeing is financially sound, said
"There are maybe six major insurance companies
left that still offer disability insurance," he
said. "There are lots of smaller companies that
offer disability insurance, but you should check
their financial statements. Make sure they look
like they'll be able to pay out claims as time
To check insurance company ratings, check
moodys.com, standardandpoors.com or ambest.com.
Aim for a non-cancelable contract. Next
on your checklist is renewability, or whether your
policy's terms are subject to change over time.
There are three options: a non-cancelable and
guaranteed renewable policy, a guaranteed
renewable policy, and a conditionally renewable
Experts say the non-cancelable contract,
especially if price is not an issue, is by far the
best of the three. That's because it locks in your
rates and benefits. The insurance company can't
make changes unless you request them.
A guaranteed renewable policy is less
desirable. After you invest in a policy, your
insurer doesn't have the right to drop you, said
Susan Baker, manager of DI sales and marketing for
Berkshire Life Insurance, but they reserve the
right to raise prices for specific reasons.
"All the companies that are writing guaranteed
renewable contracts used to write non-cancelable
contracts," said Crawford. "They often say the two
are the same, but they're not. There's a reason
why they're leaving themselves the back door
Finally, avoid conditionally renewable
policies. An insurer can put any condition on them
or raise rates at any time.
Look for a broad definition of "total
disability." The most consumer-friendly
definition of total disability is "own-occupation
disability." If you are disabled and cannot
perform the principal duties of the job you
currently have, you get paid your disability
benefit even if you can do some other tasks.
"Even if they become disabled, most people want
to keep working," said Crawford. "The neat thing
about own-occupation coverage is that you're not
penalized for working at the flower shop down the
street, even if you can't yet go back to your
The most conservative definition of total
disability is "any-occupation disability." Under
this definition you do not get a benefit unless
you are completely unemployed and unable to do any
Many companies, of course, will define
"disability" in shades of gray between
own-occupation and any-occupation disability. And
some disability insurance products will give you
own-occupation coverage for a specified period,
then move you to a modified plan, increasingly
contingent on whether you can produce any income.
Buy residual or partial disability coverage.
A third of Northwestern Mutual's claims are for
partial disability coverage, said Meridee Maynard,
vice president of disability income products at
Insurers pay partial disability benefits if you
can only work at your job for a reduced period of
time. After an accident, for example, someone
might leave work entirely for six months, then
work on a reduced schedule for the next year. If
working part-time meant the person lost a
percentage of his income, partial disability
coverage would kick in and pay a proportionate
Get the appropriate riders. If you have
disability coverage, you may not use it for
decades -- if ever -- and $3,000 a month in ten
years will buy you considerably less than it does
now. You might want to buy a rider that adjusts
your policy for inflation, particularly if you're
in your 20s and 30s, said Baker.
Another option to consider is what Baker terms
a "future purchase option" - it allows you to buy
more coverage as your salary rises or your
business expands. This is especially good for
people just starting their careers.
Putting a price tag on your
Crawford tells clients that disability
insurance premiums will typically cost between 1
percent and 3 percent of annual income. Prices
will vary according to several main factors,
including your age, gender, health history and
Another factor affecting your premiums is the
policy's elimination period. That's a specified
length of time -- people usually choose 90 days --
from the onset date of disability. When that time
is up, the company starts paying your benefits.
You can choose an elimination period as short as
30 days or as long as 720 days. Generally, the
longer your elimination period is, the cheaper
You'll also have to choose a benefit period, or
the length of time the insurer will pay you
benefits. Most companies let you choose between
benefits lasting two years, five years, all the
way to age 65, to age 67, or for the rest of your
life. Most people choose the age-65 option, as
Social Security kicks in thereafter. The longer
your benefit period, the more expensive your
policy will be.
When they price your policy, each insurer
categorizes you according to its own set of
occupation classes, ranking systems that sort
different jobs according to their likelihood of
filing a claim. The more likely your occupation is
to result in disability, the more expensive your
coverage will be.
And if you work at a job that requires intense
manual labor, like construction work, it's likely
you'll be unable to get coverage at one of the big
disability insurers, Crawford said.
"You'll have to go to a smaller insurer. They
won't make you necessarily pay more for coverage,
but you'll get a stripped-down contract, without
any bells and whistles," he said.