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Disability insurance less popular than life but can be more important

Monday, November 20, 2000

By Deborah Mendenhall, Post-Gazette Staff Writer

Families often consider life insurance as necessary as a sound roof when it comes to protecting them from the harsh winds of fate, especially when children are small. Primary bread earners want assurance that if the worst happens, the house will be paid for and the youngsters can go to college.

(Stacy Innerst, Post-Gazette)

But they often forget the second worst thing: a disability that could knock the family provider out of the workplace. While industry studies show that workers are three to five times more likely to be disabled than die early, disability insurance is often neglected.

"Much less disability insurance is sold in this country than life insurance," said John Grogan, director of disability benefits for Northwestern Mutual in Milwaukee. "But anyone who relies on income to support his family needs it."

While premature death tends to have a bigger emotional impact, disability can be equally, if not more, devastating to a family's financial stability, said Tom Wildsmith, policy research actuary for Health Insurance Association of America, a trade association in Washington, D.C.

"The largest financial asset most of us have is our ability to earn a living," Wildsmith said. "Twenty years of income is a awful lot of money to lose."

Income loss could be accompanied by unexpected expenses such as rehabilitation, education or training for a new job, modifications to the home or car to accommodate a handicap, and round-the-clock medical care, he said.

Many national firms sell disability insurance, and policies vary in coverage, benefits and cost.

In general, a policy that would protect 60 percent of the worker's yearly income would cost between 1 percent and 3 percent of the annual salary. The waiting period before benefits kick in ranges from three months to two years, depending on the policy.

If the worker pays for the policy, benefits would be tax-free. If his employer pays for the policy, payments are taxed.

Companies will insure up to 60 percent of an annual salary, but workers can buy any number of policies or supplement a company-provided policy to guarantee that amount.

Some companies sell a "top hat" plan that would replace the taxes a worker would have to pay under his employer's disability policy, and bring the amount he receives up to 60 percent of his pay.

Consumers can buy policies that offer disability payments for two years, five years or until the age of 65, when Social Security would be available. Some companies charge an additional fee for policies that guarantee lifetime payments.

A good comprehensive policy would cost a worker with an annual $80,000 salary $1,300 a year, with lifetime payment coverage costing him about $1,500 a year, said Steve Crawford, director of Guardian Disability Insurance Brokerage.

Most companies offer "income replacement" insurance, which would protect the amount of salary a worker loses if a disability forces him into another field.

Guardian and Northwestern Mutual are among a smaller number of firms that also offer noncancelable, own-occupation disability policies.

A noncancelable policy protects the income a worker earns in his chosen field, even if he is disabled after he leaves that job for another profession.

Own-occupation coverage pays benefits to disabled workers who can't perform their old jobs, even if they are able to work in another field.

If a policy is "guarantee renewable," but not "noncancelable," that means a company can raise the rates or modify coverage, Crawford said. "As a consumer, I would think twice about buying that kind of policy," he said.

The benefits of some private policies would be reduced if the disabled worker receives disability payments through Social Security or state plans, such as Pennsylvania workers' compensation.

Some speculate that workers don't buy private policies because they think they will be well protected by government plans.

But while they offer a hedge against disaster, government benefits are perceived as difficult to qualify for, and Pennsylvania's workers' compensation covers only on-the-job injuries.

To be eligible for Social Security disability payments, a person must be unable to work in any field, and the disability must "be expected to last a year or to result in death." There is no provision for partial or short-term disabilities.

Initially, 37 percent of the 2.03 million workers who applied were approved for Social Security benefits last year. After appeals, that number jumped to 55 percent.

A 45-year-old worker with a spouse and child who was making an annual $80,000 before the injury could receive about $2,500 a month from Social Security. Benefits would stop if his medical condition improved or if he earned $700 a month.

Pennsylvania companies are required to provide worker's compensation coverage. Under the provisions, disabled workers are eligible to receive two-thirds of their salary up to maximum payments of $588 a week, said John Currie, spokesman for the Pennsylvania Department of Labor and Industry. Benefits would continue until the worker could go back to his job or other work, he said.

If you decide to buy a private disability insurance policy, remember that policies are legal contracts. Read and compare the policies and understand the provisions before you sign. In comparing policies, you might want to consider:

Is disability defined as your inability to perform your own job or any job?

Does the policy cover accidents and illness?

Are benefits paid for partial or recurring disabilities?

Are full benefits paid after loss of sight, speech, hearing or use of limbs?

Is the policy noncancelable, guaranteed renewable or conditionally renewable?

How long must the worker be disabled before premiums are waived?

Is there an option to buy additional coverage, without evidence of medical insurability, at a later date?

Does the policy offer an inflation adjustment feature?



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