Disability Insurance 101
Andy G. Borgia, CLU and D.K. Unger, the principals at DI 4 MDs, have collectively been advising physicians, business executives and other professionals for over 40 years and have developed great knowledge and resources when it comes to their clients’ life & disability insurance needs. We caught up with them to hear about the importance of disability insurance and the impact that the pandemic has had on the sector.
How has COVID-19 impacted the disability and life insurance industry?
The impact the virus has had on the insurance industry, which usually moves at a glacial pace, has been astonishing and compassionate. For premium payments, all life and disability policies have a 30-day grace period – from when premiums are due to when they need to be paid. These have all been extended by at least 60 days for a total of 90. The procedure to obtain the extension differs by company but is very easy and accessible.
In regards to underwriting, the process by which insurance policies are approved, the amounts have been increased substantially for both disability and life insurance to obtain coverage without a face-to-face medical exam or lab work. For disability insurance, if you are under the age of 50 you can now obtain as much as $10,000/mo of own occupation disability insurance exam free. The situation is even better for life insurance. You can obtain up to $2M of level premium term life insurance without an exam and have the coverage in effect within days or weeks – unless you have a major medical issue. Most individuals with a family should maintain 7-10 times their annual income in life insurance; key-person disability and life insurance amounts required vary based on the situation.
What is disability insurance and why is it needed?
It is insurance that will pay a percentage of your monthly income if you become disabled due to a sickness or accident and are unable to work. The current pandemic demonstrates the power of income and how it is a critical asset to life as we know it. Disability insurance is the only type of insurance that pays you. May was Disability Insurance Awareness Month and it could not have been timelier as many Americans experienced life with no income. Most employed people living in the United States have little or no disability insurance or paycheck preservation and depend on a constant income stream, many times two, so that all their monthly obligations are met. And many of those who have employer-provided disability insurance fail to secure sufficient amounts; particularly high-earning professionals and executives.
According to a Life Happens study, three in ten Americans will become disabled for a period in excess of 90 days during their working career. The value of disability insurance couldn’t be clearer. Although commonly misunderstood and often ignored, disability insurance should be a requisite for any employed person, especially those with high incomes.
Types of disability insurance
Individual policy is a contract between you and the insurance company. Such policies should be non-cancellable and guaranteed renewable, which means the premiums never change and are at a guaranteed level. The policy can never be cancelled, contractual provisions changed, or exclusions added so long as the premiums are paid. This type of contract will protect you if unable to work in the profession or occupation you were performing at the time of claim and are extremely valuable to the high-earning executive and professional.
Association plans are contracts between the insurance company and the Association. Premiums increase, and the premium schedule and any policy provisions are at risk of change. Partial disability benefits are typically only paid if total disability benefits are paid first. The insurance company can cancel the policy at any policy renewal. Due to the uncertain nature of these policies and more restrictive policy provisions, Association plans should only be used to supplement individual policies.
Group plans are usually provided by and paid for by your employer, and therefore any benefits received are taxable income. They only pay a percentage of salary and usually ignore, bonus, K-1, incentive pay and deferred compensation, potentially leaving a large portion of income exposed. Contractual provisions are restrictive, and the policy is subject to ERISA. This means that if your benefits are denied, it will be much more difficult to utilise legal remedy in the event of a claim dispute. Furthermore, if the insurance company loses in court, it is only required to pay what it would have paid for the claim originally. If you change employers, the policy does not go with you. As a result, group policies should only be used as supplements for individual policies.
Should I have disability insurance?
Statistically, everyone who works for a living should have disability insurance. However, due to the limits of government benefits and maximum amounts for employer plans, high-earning professionals, business owners and executives with incomes in excess of $300,000/yr. are extremely vulnerable and should establish their own coverage to protect the large gap between their income and available benefits. These high-earning individuals often possess unique skills and work ethic which enable their high compensation levels that make them economically vital to their family or business. Don’t ignore the importance of protecting your key employees and business expenses in the event of a disability.
The current pandemic demonstrates the power of income and how it is a critical asset to life as we know it.
Like all insurance policies, benefits for disability insurance are paid based on the contractual provisions of the policy. An experienced disability insurance agent can navigate the provisions and make certain you are protected in your own occupation or professional speciality for both total and/or partial disability for the entire benefit period, and that you qualify for the most comprehensive and cost-effective policy available based on your personal risk factors. Since insurance companies have relaxed the application requirements, it would also be prudent to evaluate your life insurance protection, especially if you have experienced a significant life event like a job change, new house, new child, etc.
What are the characteristics of individual disability insurance?
Benefits are paid after a stipulated time after the onset of disability which is written in the contract – typically 90 or 180 days – and continue until recovery or the maximum benefit period which is typically between the age of 65 and 67. The monthly benefit is determined at the time the contract is established and is based on income at contract inception. This benefit can be as high as $250,000 per month. A portion of the benefit is paid in the event of a partial disability. Premiums remain level and are based on occupation, gender, age, income, state of residence, avocations and health. Medical approval is normally required, however, if several individuals apply from the same entity, approval may be guaranteed. Discounts are also available.
For more information:
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