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Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Monday, February 15, 2010

The Insurance Policy Often Overlooked

We all know that it’s a sure thing that ultimately our lives will someday come to an end. And just in case we should die unexpectedly, most people take out a life insurance policy. What many people don’t know, however, is that on any given day they have a far greater chance of becoming disabled than they do of dying. Yet, all too often clients come to us with no disability insurance.

Many employers offer disability insurance as a benefit, but that number is decreasing. In some cases, employers still provide benefits but have reduced the benefit to just basic coverage. Some only provide short-term disability coverage which covers disabilities for up to just a few months. Long-term coverage often kicks in after a period of 90 to 180 days. So even if your employer provides coverage, you may want to purchase a supplemental policy.

Social Security provides coverage for disabilities but only for conditions that will leave you disabled for at least a year or are expected to be terminal. Payouts average around 40% of pay, less for high income employees. The government safety net, therefore, while helpful, will be inadequate to meet your needs.

So what should you look for in a long-term disability policy? Most important is whether the policy covers your particular occupation or any occupation. If the policy requires that you must be unable to perform any occupation, it will be very tough to collect any benefits. You need to have “own occupation” coverage. Let’s say you are a surgeon and you lose a finger in a freak accident. If you don’t have “own occupation” coverage, it is not likely that you will get any coverage. That’s because there a many jobs that you could do without your finger.

In a recent article in the Wall Street Journal titled: “Just in Case: The Skinny on Buying Disability Insurance” by Anna Wilde Mathews, Ms. Mathews suggested that you also check the following when purchasing a disability policy:

(1) What exactly does it pay? Does it cover just your base salary or bonuses and commissions?
(2) Can you continue the policy if you change employers?
(3) Are there exclusions such as mental illness?

Be aware that you can typically only purchase coverage up to about 60% of your income. This is due to the fact that few people would ever be motivated to make an effort to return to work if their disability benefit was 100% of their previous income. Therefore you need to be sure you have a sound emergency fund and avoid over-extending yourself with fixed, non-discretionary expenses that you would be unable to cover during a potential disability.

Many people think disabilities only happen to others. Don’t get caught without this important coverage. It could be a lifesaver for your financial future.


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