Disability Insurance

Typically when we think of protecting our assets we think of our home or car. Another area of insurance that we are keenly aware of is insurance to cover medical expenses. However, we frequently forget; what allows us to afford these items is our earning potential. This is where disability insurance becomes so critical.

If you are the primary wage earner for yourself and your household, imagine for a minute what life would be like if that income was no longer there. This scenario is much worse than being laid off or having temporarily suffered a loss of job where there is a strong conviction to find alternative work. All of your monthly bills from groceries to mortgage payments would still be due, month after month. A disability that prevents the income that you have come to rely on could be a serious financial threat to your family. It will immediately jeopardize your feature and will quickly threaten your present lifestyle. Disability insurance will protect you and your family from this potentially frightening situation.

Do any of These Statements Apply To You?

I have invested a substantial amount of time and money to get where I am today in my profession.
My earnings potential is very high.
I own my own business.
I'd really like to work with someone who understands the unique needs of my business.

You probably insure your home, car, and other personal assets. But are you protecting your most valuable asset...your ability to earn an income? If you get hurt in an accident tomorrow are you and your family protected against Disability? You've invested a lot of time and money to get where you are today. Your special training and experience give you the potential to earn a substantial income during your career. Have you taken steps to protect that income?

Frequently Asked Questions

What is Disability Insurance?

Disability Income Insurance is a type of insurance coverage that is designed to help replace lost income due to covered disabling injuries or illnesses. Disability insurance can help preserve your family's income in the event you become disabled.

How Much Disability Insurance Coverage Do I Need?

You should consider obtaining Disability Insurance enough coverage to maintain the present lifestyle your family has. This means taking into account rent or mortgage payment, food, automobiles and other monthly expenses. You should be aware that income from Social Security benefits or employer related plans most likely would not come close to covering your expenses.

Some Disability insurance policies may limit coverage to a percentage of earnings or to a maximum dollar amount (Usually 60% to 70% of your current income). Would this limited amount be enough for you and your family to live on? Would you have other means of support? Be sure to discuss this matter with your financial advisor.

How Much Does Disability Insurance Cost?

Disability insurance premiums can range from as little as a few hundred dollars to several thousand annually, it just depends on your individual situation. It usually makes the most sense to purchase as much coverage as you can comfortably afford.

I am healthy, I know I can earn a living.

This is a common misconception. People can become disabled in many ways; workplace injury, car accident or the onset of a debilitating medical condition. Statistically between the ages of 35 and 65 seven out of ten people will become disabled for three months or longer.

Won't Social Security help me?

Social Security benefits are extremely difficult to qualify for and take a great deal of time to finally start. You must prove that not only are you incapable of performing your usual occupation but any occupation. In addition, the benefits most likely will not meet your financial obligations. The maximum payment for a 30-year-old earning $70,000.00 per year is $1,600.00 per month.

What about employer provided group disability or worker compensation coverage?

Workers compensation only covers individuals that have been injured on the job and those benefits are typically quite low and do not come close to covering your earnings. Group disability plans through an employer are not prevalent, less than 41 % of companies with over 100 employee's and less than 19% of companies with under 100 employees provide this coverage. Also these benefits will not be adequate to replace income.

What Is Your Earnings Potential? Why should I purchase disability insurance now?

What would you do if you were too sick or hurt to work? If you're like most people, you find it hard to live within your income...How would you live without it? Your most important asset is your ability to produce an income!

As with most types of insurance, the older you get the more expensive the coverage will become. Statistically you may be more likely to become disabled, as you get older. It is not guaranteed that you can be insured and as you increase in age; this will affect your ability to acquire a policy. Most importantly an accident or debilitating illness could strike at any time.

This table calculates what your potential earnings may be up to age 50. If you were to become disabled at age 35, and your monthly income was $3,000 per month, you would face a lifetime loss of $1,460,451.00 in wages.

Current Monthly Income
Age	$2,000	$3,000	$4,000	$5,000	$7,000	$10,000	$15,000
25	$1,449,648	$2,174,471	$2,899,295	$3,624,119	$5,073,767	$7,248,238	$10,872,357
30	$1,199,867	$1,799,801	$2,399,735	$2,999,669	$4,199,563	$5,999,337	$8,999,006
35	$973,634	$1,460,451	$1,947,268	$2,434,085	$3,407,719	$4,868,170	$7,303,254
40	$768,727	$1,153,091	$1,537,454	$1,921,818	$2,690,545	$3,843,636	$5,765,454
45	$583,137	$874,705	$1,166,274	$1,457,842	$2,040,979	$2,915,684	$4,373,527
50	$415,042	$622,563	$830,084	$1,037,605	$1,452,647	$2,075,210	$3,112,815

Most people's Income rises as they get better jobs or promotions. This table shows the effects of 5% annual increase in salary.(all figures were rounded to the nearest 1,000)

Potential Earnings To Age 65 (with 5% annual salary increases)
Annual Income
AGE	$25,000	$50,000	$75,000	$100,000	$150,000	$200,000
30	$2,258,000	$4,516,000	$6,774,000	$9,032,000	$13,548,000	$18,064,000
35	$1,661,000	$3,322,000	$4,983,000	$6,644,000	$9,966,000	$13,288,000
40	$1,193,000	$2,386,000	$3,580,000	$4,773,000	$7,159,000	$9,545,000
45	$827,000	$1,653,000	$2,480,000	$3,307,000	$4,960,000	$6,613,000
50	$539,000	$1,079,000	$1,618,000	$2,158,000	$3,237,000	$4,316,000
55	$314,000	$629,000	$943,000	$1,258,000	$1,887,000	$2,516,000
60	$138,000	$276,000	$414,000	$553,000	$829,000	$1,105,000

How long do plans pay a benefit?

There are many different Disability Insurance plans with different options on this. The best plan would be one that will replace the lost income until you are 65 years of age. Any other may not meet the demands of your financial obligations.

What is the definition of disabled?

This will be a critical element to any Disability Insurance policy that you purchase. The definitions may vary. You should consider a plan that defines "disabled" as being unable to continue in your present occupation. Most workers have obtained a skill that pays them at a salary reflective of that. A good policy is going to replace the income that you would have lost if you are no longer capable of that earning power. There are plans that call for you to be unable to perform, "any occupation". These should be avoided, as they are not reflective of your loss. See the table below for more

What is an Elimination Period?

An elimination period is similar to the deductible on an auto policy. It will be the amount of time, generally quantified in a number of days, where you will have to wait until benefits are paid. As in an auto policy this will have a direct effect on the cost of your premiums. A typical Elimination period would be approximately 90 days. This means that in order to be protected, you would need to have your own financial resources to last 90 days without any income

Disability Insurance Policy Considerations

All policies will have variations to them as companies compete and offer different products to their customers. However, some key components you should consider when reviewing a Disability Insurance policy are shown here. Not all Disability Insurance policies are alike and even if you currently participate in a group disability income insurance program, you may not have the level or quality of coverage you need to protect your loved ones. Disability Insurance Offers you:

Potentially high income protection
Flexibility to keep up with increasing income needs
Prompt payment of eligible claim benefits
Refund of a portion of premium payments if you stay healthy (Premium Refund Option rider may not be available in your state and requires additional premium. Refund will be offset by any claims benefits paid.)

Key Component

Component Description

Benefit Amount

This feature is the amount that the policy will pay to you should you become disabled.

Benefit Period

This will define how long benefits will be paid. It could be 5 years or until age 65. The length of benefits paid will be directly proportional to the cost of the policy.

Definition of Disability

This is an important part of any policy. Be sure you fully understand how disabled will be defined. As noted above, being unable to perform your present occupation is what you want. There are two general types of disability definitions that you should be aware of. One is, Own Occupation, which states that in order to be declared disabled you cannot perform your particular occupation. Typically this would be the best as your earning potential will be greatest with your career skills. Your Occupation or Own Occupation not engaged: The inability to perform the substantial and material duties of your occupation and not working.
The other type of definition is Any Occupation, which would stipulate that you are unable to perform any occupation. Think of telemarketing as an example of "Any Occupation".

FIO, APB, GIO, Benefit Update or Guaranteed Insurability

This feature allows you to increase your policy amount in the future as your income grows without having to formally reapply. Financial verification will be necessary when exercising the option.

Guaranteed Renewable Policy

This type of policy is guaranteed as renewable, as long as the premiums are paid, but the premiums can be raised for a class of policyholders through regulatory state approval.

Inflation Protection
COLA or
Cost of Living adjustment

Having this in your policy, which is typically offered as a rider, will factor inflation into your paid benefits. This should be seriously considered, as a monthly amount now will be quite different in value 20 years from now. Inflation riders are generally offered in two forms.

Simple the monthly benefit identified in the policy is applied to an inflation factor
Compound the inflation factor is applied each year to last year's amount.

Inflation effects your expenses in a compound fashion. This means that the only way to stay with inflationary forces is with a compound inflation rider.

Long Term Disability

This product would pay benefits up to age 65.

Non-Cancelable Policy

This type of policy will be guaranteed renewable, as long as the premiums are paid, and will have premiums that cannot be raised.

Partial Disability Benefits

With this type of policy you would be paid a certain amount for a defined period of time when declared disabled.

Residual Benefits

Usually added by rider, this feature allows the insured to collect benefits while residually disabled and working. The definition usually reads due to injury or sickness the insured is unable to perform one or more of the substantial or material duties of their occupation, is working and is suffering a loss of income of at least 20%. If the insured has a loss of income of 75% the insured is deemed totally disabled and receives full benefit.

Short Term Disability

This would pay benefits for a specific period of time, for example 2 years.

Waiver of Premium

This feature allows for the premiums that you pay to be waived upon receiving benefits.

Return of Premium

A type of cash value rider that returns a specified number of years of premium i.e., 8yrs of premium back after 10 yrs paid (all returns are less any claim payments made).
Comparison of Disability Insurance policy with Return of Premium, to the same policy without the Return of Premium, and the difference accumulated at 8% compounded net after federal income taxes.

Year	Policy with Return of Premium	Refund in Year ten¹	Coverage Without Return of Premium	Difference	Difference Accumulated at 8% compounded after taxes
1	$3,568.13		$2,567.00	$1,001.13	$1,081.22
2	$3,568.13		$2,567.00	$1,001.13	$2,248.94
3	$3,568.13		$2,567.00	$1,001.13	$3,510.08
4	$3,568.13		$2,567.00	$1,001.13	$4,872.10
5	$3,568.13		$2,567.00	$1,001.13	$6,343.09
6	$3,568.13		$2,567.00	$1,001.13	$7,931.75
7	$3,568.13		$2,567.00	$1,001.13	$9,647.51
8	$3,568.13		$2,567.00	$1,001.13	$11,500.54
9	$3,568.13		$2,567.00	$1,001.13	$13,501.80
10	$3,568.13	$28,545.00	$2,567.00	$1,001.13	$15,663.16

In order to make the return equal at the end of 10 years, the difference in premium would have to be invested at the following percentage rate compounded AFTER TAXES, 18.47%, BEFORE TAXES, 26.77%.(31% Federal Income Tax Bracket; State Income tax not included) ¹ Assumes no claims or dividends. Return of Premium rider refunds 80% of premium paid after 10 years, less claims & dividends.

B.O.E., Business Overhead or O.E

This is a disability policy designed for business owners to reimburse them for business expenses while disabled (examples of covered expenses are Rent, Utilities, Telephone, Property taxes and employees salaries to name a few).

Buy/sell or Buyout

A disability policy designed for 2 to 8 business owners to fund a Buy sell agreement for disability.

When making a decision regarding Disability Insurance, consider the following:

In 1993 - Social Security denied 55 % of 1.4 million applications it received.
In 1998 - only 35% of Social Security disability claims were approved.
Over 5 months must pass before Social Security will pay on an approved claim
Social Security requires that you cannot perform "any" gainful work.
Social Security demands that the disability must last at least 12 months.
Between the ages of 35 and 65 seven out of ten people will become disabled for 3 months or longer
One out of seven employed people will be disabled for 5 years or more before age 65
Average long-term loss due to disability is over 5 years.
Average American household only has two months worth of savings in reserve.
Workers compensation coverage only covers injuries that occur on the job

Disability Income Tax Considerations

	Premium Payments		Benefit Payments
	Employer	Employee	Employer	Employee
Individual Policy Insured pays premium, owns policy and receives all benefits.	n/a	Premium paid with after-tax dollars	n/a	Not taxable
Employee Bonus Plan Employer pays bonus to insured employee. Insured pays premium, owns policy and receives benefits.	Bonus is tax deductible	Bonus is taxable as income	n/a	Not taxable
Split Dollar Employer pays part of each premium as part of a Wage Continuation Plan and employee pays the balance of the premium. Insured employee owns the policy and receives benefits.	Employer payment is tax deductible	Employer payment is not taxable to employee	n/a	Insured is taxed on amount attributable to employer payment. Balance is received tax-free.
Wage Continuation Employer pays premium. Insured employee owns policy and receives all benefits.	Employer payment is tax deductible	Employer payment is not taxable to employee	n/a	Benefit payments are 100% taxable when received
Under a Wage Continuation Plan, the insured is assumed to be an employee or stockholder employee in a regular "C" corporation. A partner, sole-proprietor, or more than a 2% stockholder in a sub-chapter "S" corporation is not considered to be an eligible employee. Disability benefits provided by a plan funded in accordance with IRC Section 125 would be the same as those outlined under a Wage Continuation Plan.
Key Person Employer pays the premium, owns the policy and receives all benefits.	Premium is not tax deductible.	n/a	Benefits received tax-free. Would be tax deductible if benefits were paid to employee.	Any payments received are taxable as income.
Business Overhead Expense Sole proprietor or partner(s) pays the premium, owns the policy and receives all benefits.	Premium is deductible as a business expense	n/a	Benefits are received as income, becomes a wash as expenses are paid.	n/a
Buy/sell Disability Partners/Stockholder pays the premium, owns the policy and receives all benefits.	Premium is not tax deductible.	Premium is not tax deductible.	Benefits received tax-free.	n/a

Disability Insurance Company Ratings

Financial soundness is a critical element you should consider when entering into a policy with a company. When making a decision about a company, do not be afraid to ask and check the financial rating for each company. The ratings shown below are taken from some of the prominent rating services.

A.M. Best Company: This rating service is perhaps the best known of all the insurance rating companies. It publishes over 50 different information products about insurance companies and the insurance industry. The following table describes the A.M. Best rating system.

Company Outlook	Rating	Criteria
Secure	A++ and A+ (Superior)	This company has demonstrated superior overall performance and has a very strong ability to meet its obligations to policyholders over a long period of time.
	A and A- (Excellent)	This company has demonstrated excellent overall performance and has a strong ability to meet its obligations to policyholders over a long period of time.
	B++ and B+ (Very Good)	The company has demonstrated very good overall performance and has a good ability to meet its obligations to policyholders over a long period of time.
Vulnerable	B and B- (Adequate)	The company has an adequate overall performance and can meet its obligations to policyholders, but may be vulnerable to unfavorable changes in underwriting or economic conditions.
	C++ and C+ (Fair)	The company has demonstrated fair overall performance and can meet its current obligations to policyholders, but is vulnerable to unfavorable changes in underwriting or economic conditions.
	C and C- (Marginal)	The company has demonstrated marginal overall performance. It can meet its current obligations to policyholders, but it is very vulnerable to unfavorable changes in underwriting or economic conditions.
	D (Very Vulnerable)	This company has demonstrated poor overall performance. This company can meet its obligations to policyholders, but is extremely vulnerable to unfavorable changes in underwriting or economic conditions.
	E (Under State Supervision)	The company is under state insurance regulatory authority supervision, control or restraint, such as conservatorship or rehabilitation, but not including liquidation. This rating may be assigned if the company is under a cease and desist order issued by a state regulator other than from its state of domicile.
	F (In Liquidation)	This company has been placed under an order of liquidation by a court of law, or its owners have voluntarily agreed to liquidate. Companies that voluntarily liquidate or dissolve their charters are generally not insolvent.

Standard & Poor's This rating service rates the claims-paying ability of over 300 insurance organizations worldwide, and monitors public data on another 2,000 U.S. companies.

Company Outlook	Rating	Criteria
Secure	AAA	Superior financial security on an absolute and relative basis. Capacity to meet policyholder obligations is overwhelming under a variety of economic and underwriting conditions.
	AA	Excellent financial security. Capacity to meet policyholder obligations is strong under a variety of economic and underwriting conditions.
	A	Good financial security, but capacity to meet policyholder obligations is somewhat susceptible to adverse economic and underwriting conditions.
	BBB	Adequate financial security, but capacity to meet policyholder obligations is susceptible to adverse economic and underwriting conditions.
Vulnerable	BB	Financial security may be adequate, but capability to meet policyholder obligations, particularly with respect to long-term policies, is vulnerable to adverse economic and underwriting conditions.
	B	Vulnerable financial security. Currently able to meet policyholder obligations, but that capability is particularly vulnerable to adverse economic and underwriting conditions.
	CCC	Extremely vulnerable financial security. Continued capability to meet policyholder obligations is highly questionable unless favorable economic and underwriting conditions prevail.
	NR	Not Rated. The insurer is not rated by Standard & Poor's.
	R	Regulatory control. As of the date indicated, the insurer is under supervision of insurance regulators following rehabilitation, receivership, liquidation, or any other action that reflects regulatory concern about the insurer's financial condition. Information on this status is provided by the National Association of Insurance Commissioners and other regulatory bodies. Although believed to be accurate, this information is not guaranteed. The "R" rating does not apply to insurers subject only to non financial actions such as market conduct violations.
Plus (+) or Minus (-) Sign	The ratings from "AA" to "B" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. Standard & Poor's ratings and other assessments of credit worthiness and financial strength are not a recommendation to purchase or discontinue any policy or contract issues by an insurer or to buy, hold or sell any security issued by an insurer. In addition, neither a rating nor an assessment is a guaranty of an insurer's financial strength.

Moody's Investors Services This rating service rates the claims-paying ability of over 300 insurance organizations worldwide, and monitors public data on another 2,000 U.S. companies.

Company Outlook	Rating	Criteria
Strong	Aaa	Exceptional financial security. While the financial strength of these companies may change, such changes as can be visualized are most unlikely to impair their fundamentally strong position.
	Aa	Excellent financial security, together with the Aaa group, they constitute what are generally known as high-grade companies. They are rated lower than Aaa companies because long-term risks appear somewhat larger.
	A	Good financial security. However, elements may be present which suggest a susceptibility to impairment sometime in their future.
	Baa	Adequate financial security. However, certain protective elements may be lacking or may be characteristically unreliable over any great length of time.
Weak	Ba	Questionable financial security. Often the ability of these companies to meet policyholder obligations may be very moderate and thereby not well safeguarded in the future.
	B	Poor financial security. Assurance of punctual payment of policyholder obligations over any long period of time is small.
	Caa	Very poor financial security. They may be in default on their policyholder obligations or there may be present elements of danger with respect to punctual payment of policyholder obligations claims.
	Ca	Extremely poor financial security. Such companies are often in default on their policyholder obligations or have other marked shortcomings.
	C	The lowest rated class of insurance company; can be regarded as having extremely poor prospects of ever offering financial security.
1, 2, 3 Modifiers	These modifiers can be used for each generic rating category from Aa to B. indicates that the insurance company ranks in the higher end of its generic rating category. indicates a mid-range ranking. indicates that the company ranks in the lower end of its generic category

Protecting income is an essential part of any financial strategy. Find out if your financial strategy is complete. Ask me about a financial needs analysis for you or your business.