Personal finance isn’t just about growing your finances — it’s also about protecting what you have. Most experts advise insuring your home, your car, your health and your life. What many people never get around to doing is insuring their earning power.

According to The Wall Street Journal in a December 2006 article “The Growing Appeal of Disability Insurance”: Even consumer advocates who are often critical of the insurance industry for pushing unnecessary products (such as life insurance for someone with no dependents) say that a disability policy can be a smart buy. “Disability insurance would probably be the one insurance product that is undersold,” says J. Robert Hunter, insurance director for the Consumer Federation of America.

If you have benefits through your employer, you are probably smugly thinking that you are already covered. Check again. You likely have a false sense of security and don’t have coverage. If you do have coverage, it likely is for short-term only (for example, just for five years), or the benefits paid are not enough. What you need is long-term coverage, until social security kicks in (at age 65).

If your employer is paying the premium, you will be taxed on the benefits, so factor that into your calculations. According to the Bureau of Labor Statistics, less than a third of all workers in private industry have long-term disability insurance. Only 40% of managerial and professional workers do.

What’s your situation?
If you have a coverage gap, or if you are self-employed, you need to find your own disability insurance. Unfortunately, it’s not easy. In fact, it’s been one of the most confusing processes some consumers have ever undertaken.

Disability insurance can guard your family and loved ones from potential financial disaster.  Before purchasing disability insurance, all applicants and policyholders should request and verify their annual medical report files to ensure they are not overpaying for errors or in danger of coverage denial.

Why do you need disability insurance?
During your working years, you are more likely to face disability than death. Nearly one out of every three workers will suffer a disability lasting three months or more at some point during their career, according to the Life & Health Insurance Foundation for Education (LIFE).

And disability isn’t a one-time event. The repercussions can continue for months — sometimes years — impacting the financial security of you and your family. If you can’t do your job, money isn’t coming in, and the bills start piling up. As financial guru David Bach puts it: “What this means to you and me is that the greatest threat to our ability to finish rich may be the risk we all face of serious injury or illness! And the younger you are, the greater your risk actually is.”

Also, according to The Wall Street Journal article: Americans are recovering and living longer from accidents and diseases such as cancer, but they aren’t always able to go back to their jobs. And some research, such as a recent Hartford Insurance Co. study, suggests that rising rates of obesity and diabetes are leaving workers disabled at younger ages than in recent past. Cancer was the number one cause of long-term disability last year at the largest disability insurer, UnumProvident, the company says. Other top causes include complications of pregnancy, musculoskeletal diseases, back injuries and heart disease.

What should you look for in a disability insurance policy?

  • Look for an “own occupation” policy. This means that if you can’t do your current job, the coverage will protect you. If you have an “any occupation” policy, then as long as you do any job including sweeping floors in a warehouse, flipping hamburgers or making telesales calls, then the policy will not pay out.
  • Look for coverage to age 65 when your retirement benefits will kick in.
  • Figure out how long you can last before the disability benefits start. Once again, the benefits of an emergency fund come to the fore. If you have a healthy emergency fund and can last for six months (or longer, particularly if your employer has a short-term plan in place), you can save significantly on premiums. Get quotes for 90 days, and 180 days or more so you can consider what works best for your financial situation. Interestingly, LIFE says that 70 percent of working Americans only have enough money to be off work for one month before everyday expenses would force them to go back to work. If they can’t work, then the only option is debt.
  • Decide how much you want in benefits. Many policies will offer a benefit equal to about 60% of your gross income. If you are paying your own premiums, you will not be taxed on the benefits, so factor that into your calculations.
  • Insurers rank you according to your occupational class. Those with occupations in a higher risk category will pay additional premium costs. This includes high-risk profession and occupations with hard to verify incomes. Specifically, insurers are wary of underwriting someone whose income is harder to verify. This includes home-based people like freelance graphic designers, writers, consultants and accountants. However, the longer you have been running your business, and the more records you have to prove your income (generally, they look for three years’ worth), the lower your risk to the insurance company. Interestingly, rates are higher for women than for men of the same age, because the risk of a woman suffering a long-term disability is higher.
  • Make sure that your policy is guaranteed renewable. This means that your coverage is guaranteed renewable to the termination date (in our case, to age 65) as long as the premium is paid on time. The insurer cannot change any feature of the policy, except for the premium, until the termination date. The premium can only be changed if the change is made for all policies with the similar benefits insuring the same risk class.

The investigation and resulting evaluation of the risk during the application process for insurance is termed underwriting. Health and lifestyle questions are asked. Certain responses or information received may merit further investigation. Disability insurance companies in the United States support the Medical Information Bureau Inc. (MIB), which is a clearinghouse of information on persons who have applied for life and disability insurance with participating companies in the last seven years. As part of the application, the insurer receives permission to obtain information from the proposed insured’s physicians.

Buying disability insurance is hard. It’s confusing, and you can’t do it by simply filling out a form online. There are a number of avenues to try:

Applying for disability insurance policies
The standard advice is to ask friends and family. Otherwise, check the website of the National Association of Insurance Commissioners (NAIC); the mission of the NAIC is to assist state insurance regulators, individually and collectively, in serving the public interest and achieving the fundamental insurance regulatory goals in a responsive, efficient and cost effective manner. The National Association of Insurance Commissioners (NAIC) website has links to the State Insurance Commissioner websites for all 50 states.

Here’s how you can make your experience easier:

  • The best option is to find a broker who can get you several quotes from different companies. Bob Hunter also recommends this as the easiest way to buy disability insurance. One way to find a broker would be to call Disability Insurance Services and ask them to recommend a broker in your area. (Numbers for different regions are on the contacts page on their website.) Or call the insurance companies directly and ask for a local broker contact. Finally, try the Yellow Pages and see if any insurance brokers say they specialize in disability insurance.
  • Research, research, research. Check the relevant sections in your favorite personal finance books for things to look for when choosing a policy. Also, check the industry ratings (Moody’s, Best, etc) of the different companies and also do some sleuthing about which ones have class action lawsuits against them.
  • Don’t trust the advice and opinion of one person. Experience shows that there is a lot of conflicting advice out there. Bob Hunter says that some of the people selling insurance frankly don’t really know what they are doing. Make sure that you work with more than one person. Try working with a broker and also directly with some other companies.
  • Get it in writing. For example, a MetLife policy which changed from “own occupation” to “any occupation” after two years of disability will require you to take any employment and will not pay out upon partial disability.
  • Try, try, and try again, particularly if you work in a higher risk occupation. If you are a freelancer, you may need to wait to apply until you have been in business for three years.
  • Your emergency fund gains even more importance when considering disability insurance. If you can save enough to protect you for six months (or more) instead of three months, you can save significantly on premiums.

Working with professional organizations or associations
If you have a trade association, you can often take advantage of their group policies. J. Robert Hunter, insurance director from the Consumer Federation of America, who recommends that you still shop around because there are some very bad group policies out there.

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