Just last week, I received an urgent call from a client. He inquired about insurance to provide an income in the event of disability. As we talked about his sudden interest in this important coverage, he told me the following story.
“R. J., I just returned from visiting a dear college friend. Very unexpectedly, he had been diagnosed with cancer, which required an immediate brain surgery. Fortunately for my friend, they think they got it all, but he is going to be unable to work for quite some time. What is he going to do for income? And, then I thought, ‘What would I do for income if something similar happened to me and I couldn’t run the business? It would be disastrous financially.’ That’s why I am calling you for your help in creating a plan to continue to give me a paycheck in the event I am either too sick or too hurt to work.”
What if you were unable to earn your current income for more than 90 days? Would you be able to pay your bills as they become due each month? If not, then you are a prime candidate for considering what Europeans call “income insurance” and what we North Americans call “long-term disability insurance.”
Did you know that statistically it is three to six times more likely that your income will stop as a result of a disability than death? And yet disability insurance is often ignored in risk management. Although paying monthly premiums will reduce your disposable income, it is better to have sufficient disability insurance coverage than to be underinsured and face a calamity that severely reduces your ability to keep your family afloat.
Accidents Are Not the Main Cause of Long-Term Disability Claims
Most people mistakenly believe that the major cause of disability is from an accident. The statistics rebut this notion and indicate that disability is usually caused by a gradual decline in health or by a degenerative condition.
According to the Council for Disability Awareness’s 2012 Long-Term Disability Claims Review, the top four reasons for existing long-term disability claims are:
- Diseases of the musculoskeletal/connective tissue claims (30.5%),
- Nervous system related claims (13.9%),
- Cardiovascular/circulatory claims (12.3%), and
- Cancer and neoplasm claims (8.9%).
Only 7.7% of all existing claims for long-term disability claims were caused by what we fear most: accidents.
Only 34% of American Workers Have Access to Long-Term Disability Benefits
According to the U.S. Bureau of Labor’s 2014 National Compensation Survey, two-thirds of American workers do not have access to disability coverage. The numbers are relatively unchanged over the last several years.
Even if the employee has disability coverage, they are often unclear on the particulars of the benefits. In fact, a 2011 survey conducted by ADP Research Institute indicates that only 60% of employees actually understand their employee benefits.
97% of American Workers with Access to Long-Term Disability Take it
Employees comprehend and appreciate the importance of having long-term disability insurance. Even though the amount of workers who have access to long-term disability benefits is miniscule, the good news is that nearly all of those who are offered disability insurance enroll in the coverage. Many long-term disability insurance plans are contributory, which means that the employee must pay at least some part of the premium. But even with a premium contribution, the enrollment rate is a whopping 97%.
If You Are a Professional, Do You Have a True “Own-Occupation” Contract?
A true own-occupation contract means that even if you are able to work at some other type of employment, you will be deemed disabled if you cannot perform the occupation specified in the contract. Don’t make the mistake of some professionals, who think they have a true own-occupation contract because the marketing material and/or the proposal for their disability insurance mentioned that they were getting an “own-occupation” contract. The language of the marketing material and proposal are not the determining factors. Instead, you must look at the actual definition of total disability in your contract to determine whether you have a true own-occupation contract.
If you have a true own-occupation contract, the language in the contract will look something like this:
Total Disability/Totally Disabled means that due to your Injury or Sickness, you are unable to perform with reasonable continuity the substantial and material acts necessary to perform your Own Occupation in the usual and customary way.
Is the Amount of Income Replacement Sufficient In the Event of Your Disability?
A significant mistake many clients make is that they have outgrown the disability contract’s monthly benefit. The amount of the coverage, which may have covered your salary when you initially obtained the disability contract, may now be too small. Often there is room for additional coverage because your income may now be substantially higher and you may also have a larger amount of expenses that will need to be paid if you become disabled.
Consider Adding Optional Benefits to the Contract
Here are a few popular contract “riders” you should consider adding to your disability coverage:
- A Future Increase Option Rider, which provides you with the opportunity to purchase additional coverage without having to provide further proof of medical insurability.
- A Cost Of Living Adjustment Rider, which will adjust the monthly benefit to help keep pace with inflation during a disability.
- A Residual Disability Benefit Rider – your contract can protect you from an illness or injury that doesn’t cause a total disability but does limit your ability to work and results in decreased income.
- A Return to Work Rider, which allows you to continue to receive benefits even after returning to work as long as you are still experiencing a loss of income of 20% or more from previous income levels
If you depend on your current employment income to live, then you need to ensure it continues to be received even if you cannot continue to work. If you do not have long-term disability insurance, have inadequate disability coverage or want more information about an own-occupation contract, please invest in your financial security by contacting R. J. Kelly to determine how best to protect yourself and your loved ones. A contract that pays you an income when the heart attack comes up short …
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Written by R. J. Kelly – July 2015
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