Massachusetts Lesbian & Gay Bar Association
Disability Insurance
Stuart H. Armstrong II, CFP®     617-424-0005 | 800-408-8606

The Short Course in Disability Income Insurance
It'll only take a few minutes of your time….

A Few Minutes About the Rest of Your Life…..

Life isn't just about making it. At some point, it's about keeping it - everything you worked so hard to build Since you're reading this guide, chances are you're pretty well established in a successful career with a substantial income, and you're wondering how to protect what you've built against a long-term disability.

This guide will provide some quick answers to some of those questions:

Disability? Am I really vulnerable?
How can it affect me and my income?
Who does it strike - and how often?
How can I protect myself against it?

It's only income… or is it?

Income protection is important because income in important, and the higher the income, the greater its significance to your standard of living, your financial goals and your retirement savings. Look at it this way: If your income is in the upper brackets, then its value is probably reflected in the car you drive and the home where you park it each night.

Do you insure these and other assets against unforesenn risks? Naturally.

Is there a comparable risk that a long-term disability will interrupt your income before you reach age 65? Absolutely.

You wouldn't underinsure your most valuable assets, so it doesn't make sense to underinsure something as essential as your income - particularly if you are a highly paid professional.

If that category applies to you, then the best income protection available is individual disability income insurance, or DI.

This guide can help you make an informed decision about whether you need individual DI and, if so, which features are most important.

Myth vs. Reality

Two of the biggest myths about disability are that it doesn't happen to younger people and that it's largely the result of a work-related accident. The reality is, your odds of encountering a long-term disability - one lasting 90 days or more - before age 65 are:

Your Age Your Approximate Odds Average Duration
301 in 332 months
403 in 1042 months
505 in 2250 months
601 in 1054 months
Note: Statistics reflect those for men; chances are actually higher for women

If you have considered life insurance, then you already recognize the importance of buying financial protection for your family before you need it. But at age 35, for example, if you are a man you are 4.1 times more likely to be disabled before age 65 than you are to die. At age 45, the odds are 4.4 to 1. (1)

It may also surprise you to learn that fewer than 14% of disabilities are caused by injuries – most are the result of illness and many of those who receive benefits suffered a disability within a few years of purchasing their policies. (2)

(1) All statistics from: Commissioner’s Disability Table, 1985 and Commissioner’s Standard Ordinary Mortality Table, 1980.
(2) Disability Statistics Abstract Number 16 (September l996). Published by the Disability Statistics Rehabilitation Research and Training Center, University of California, San Francisco, and the National Institute on Disability and Rehabilitation Research (U.S. Department of Education).

Are There Other Alternatives to Individual DI?

Disability happens and, for the most highly paid, it can cost millions in lost income and added expenses. There are alternatives to individual DI, such as dipping into your savings, applying for Social Security benefits or participating in a group long-term disability plan from your employer or a professional association. But consider these points:

Personal Savings: Disability can be just as devastating to your family’s finances as a death: If you saved five percent of your income each year, a six-month disability could wipe out ten years of savings. Worse, as discussed earlier, most disabilities that last up to 90 days are likely to last years.

  • Individual DI not only protects your income, it protects your savings and your plans for your savings.

Social Security Disability coverage is far from guaranteed (3): Nearly 69% of all applicants are denied benefits when they make their initial claims. In fact, you don’t even qualify unless you have been disabled for at least another 12 months – or if your disability is likely to end in death. Even then, the maximum benefit payment in 2002 was around $2000 a month (exclusive of
dependents’ benefits) and the average $821. And any benefits you receive may be subject to federal income tax.

  • Individual DI policies take a far more liberal view of what constitutes total disability. Plus, they are more realistically scaled to your actual income, enabling you to replace up to about 60% of lost wages. Assuming you pay your premiums yourself with after-tax dollars, your benefits are tax free.

Group Long Term Disability Insurance may be available through your employer or a professional association, and it may cover 50 – 60% of earnings—excluding bonuses and pension contributions—and minus any government program benefits you receive. However, premiums for typical company and other association plans offered through other associations can be raised and coverage canceled at any time, making them somewhat problematical to rely on. If your employer pays the premiums then any benefits you receive will be taxable. If you leave your job you will probably loose the coverage. Finally, if your disability allows you to work at another job outside your own occupation, you may not be considered eligible for benefits.

  • Individual DI Policies can cover not only base salary, but also bonuses and, with a few insurers, pension contributions. Also, if you pay the premiums yourself, benefits are not subject to taxes. Most individual DI policies come with fixed premiums and non-cancelable coverage. Individual DI is also portable if you change jobs—even if you change careers.
  • (3) Annual Statistical Report on the Social Security Disability Insurance Program, 2002.

Questions To Ask When Considering Disability Insurance

When will the insurance company regard me as totally disabled?
Different insurance companies use different definitions of total disability. The most favorable one is “own-occupation” which means the company will pay benefits if you can’t work at your own specific occupation even if you are working in another capacity.

How much do I get paid?
Up to about 60% of net salary or business income. Most insurance companies place a cap on the maximum benefit they will pay no matter how high your income is.

When do benefits start?
You can decide that when you purchase your policy(this time is called the “elimination period.”). Depending on the elimination period, benefits can start after one month or up to two years after you become disabled.

How long will benefits last?
Typically, benefits are payable for two years, five years or to age 65. A very few companies offer the option of lifetime benefits. Again, that’s something you determine when you purchase your policy. If you are younger and just beginning to save for retirement, then you should consider lifetime coverage; if you are older and have substantial retirement savings, you may not need a benefit that extends beyond 65.

Can my policy be changed or canceled, or my premiums raised?
If you pay for something, then you should own it. A good policy cannot be changed or canceled, even if your health or financial situation changes, It should also guarantee that your premiums will remain fixed until age 65, as long as you continue to pay them.

What if I want to change my coverage?
Look for policies that allow you to increase coverage to keep pace with the cost of living or increases in your income. Some offer optional riders that allow automatic or optional increases every year. Insurers sometimes add restrictions to benefit increases if applicants have reached a certain age—say 55 or 60. So it’s best to ask early.

What if I change jobs or careers?
One advantage of owning your own DI insurance is that it’s portable. You pay for it, so you own it and you can take it with you if you leave your employer—or if you go into a completely new field or line of work.

What if I am only partially disabled?
A good policy will pay benefits if you can only work part-time and lose income as a result. Look for a policy that does this even if you don’t become totally disabled first.

If you own or share ownership of a business or professional practice, you might also consider protecting that investment. Ask about these other forms of protection.

Overhead Expense* insurance provides reimbursement for the ongoing expenses of operating your business or practice if you are disabled and can’t work. These expenses can include rent on you premises, electricity, heat, telephone, janitorial services, etc. Professionals may also be reimbursed for staff salaries and, in some cases, a portion of a replacement professional’s salary.

Disability Buy-Out** insurance reimburses the owners or partners of a business or professional practice in the event they need to buy out a disabled owner’s financial interest in the company. It not only protects a disabled partner’s financial investment in the firm, it also enables the remaining partners to keep the business healthy and active.

Finally, a disability can also interrupt contributions to your retirement plan. A very few companies offer special programs that use individual disability policies to protect your retirement plan contributions—and may even protect those made by your employer—in the event you become disabled.

* Policy Form 4100. In California, Policy Form OE102. In Montana, Policy Form NC82.

** Policy Form 3100. In California and Montana, Policy Form AH84

You depend on your income—so you need income you can depend on.

© 2007-2011 All rights reserved. Disability income products underwritten and issued by Berkshire Life Insurance Company of America, Pittsfield, MA, a wholly owned stock subsidiary of The Guardian Life Insurance Company of America (Guardian), New York, NY, or provided by Guardian.