DISABILITY INCOME PLAN

Could you continue to pay your bills if you were unable to work for any length of time because of illness or injury? If you were to become disabled, do you know how much money would be coming in each month and from what sources?

Some people can rely on disability benefits from their employers and/or the government. But, for a great many people, income stops when work stops. Individual disability income insurance is designed to replace income when illness or injury stands in the way of earning a living.

This booklet explains the various sources of disability income, what disability income insurance is, and what it covers. It includes a work sheet you can use to evaluate personal sources of disability income, as well as a checklist of policy features you can use to compare disability income insurance policies. With this information, you'll be able to make an informed decision about whether you need individual disability income insurance and, if so, what features are most important to you.
What Is Disability Insurance?

Disability income insurance provides you with an income should you become sick or injured and unable to work. It helps protect against family financial catastrophe by giving you an income to meet daily expenses.

Disability income insurance comes in two major forms:

• A variety of employer-paid and government sponsored programs, generally cost-free to the recipient, covering certain categories of workers.
• Private policies (paid for by individuals) that protect income when there are no applicable employer or government programs or when those programs do not adequately meet income needs.

As with all insurance, disability income insurance operates on the principle that many people pool small sums of money to benefit those who need help. The beneficiaries are people who need adequate income should they become disabled.
What About Social Security Disability Benefits?

Most salaried workers in the United States participate in the federal government's Social Security program. Social Security is best known for its retirement benefits. But the Social Security Administration also administers disability benefits. In 1992, 2.4 billion dollars in Social Security disability payments were sent to 4.8 million Americans.

Your salary and the number of years you have been covered under Social Security determine how much you can receive. In 1992, the average monthly payment for a disabled worker was $642; the average monthly payment for a family consisting of a disabled worker, spouse, and one or more children was $1093.

Here are some important points to remember:

• Eligibility is based on being unable to perform any gainful employment, not just the job you were performing at the time the disability began.
• You are eligible for benefits after you have been disabled for 5 months and if the disability is expected to last 12 months. Claim processing may take up to 3 months, so file as soon as possible.
• Social Security payments may be reduced by disability entitlements under other government programs. Why? Because total combined payments under Social Security, workers' compensation, civil service, and military programs generally cannot exceed 80 percent of average predisability earnings. A government pension also may reduce Social Security disability payments.
• After 24 months of benefits, recipients qualify for Medicare. If you want the medical insurance portion of Medicare, in addition to hospital coverage, you must enroll and pay a monthly premium.
• Social Security disability payments are subject to federal income tax if your adjusted gross income plus any nontaxable interest income and half of you Social Security benefits exceed a total of $25,000 (if you file tax returns individually) or $32,000 (if you file jointly). For taxable years 1994 on, up to 85 percent of Social Security disability payments are subject to federal income tax if the total--as calculated above--exceeds $34,000 (individually) or $44,000 (jointly).
• Social Security disability payments can be an important part of you income should you suffer a disabling illness or injury. Contact your local Social Security office for an estimate of the disability benefits to which you would be entitled.

Are You Eligible For Other Disability Income?

There are many other potential sources of income if you become disabled:

• Workers' compensation benefits, if you suffer an accident at work or an illness that results from your employment.
• Veterans Administration pension disability benefits, for eligible veterans.
• Civil service disability pay, for federal or state government workers.
• Black lung program for miners.
• State vocational rehabilitation programs.
• Group union disability coverage.
• Automobile insurance, if disability results from an auto accident.
• Private insurance, such as credit disability insurance, that makes monthly loan payments when you are disabled.
• Supplemental Security Income (SSI) for persons with low income and limited assets.
• Medicaid, also for persons with low income and limited assets.

The availability and extent of these and other programs vary widely in different locations. But, because one or more may be an important source of income should you become disabled, it's important to determine whether you are eligible. If you are, you should also find out how long benefits will be paid. And, of course, your own resources--the savings you've put aside over the years--are another valuable source of income.
How Much Disability Income Will You Need?

Add up all the benefits you are entitled to under the public and private programs mentioned, along with the monthly income you could count on from other sources such as your savings. If the total approaches your required income after taxes, you can assume that, should total disability strike, you would be able to pay your day-to-day bills while recuperating. You must remember that eligibility for Social Security disability benefits are contingent upon your disability being expected to last for at least 12 months. If the total from employer benefits, Social Security, and other programs along with your own resources will not be close to your pre-disability, after-tax income and will not be adequate to support your family, you will want to consider buying additional disability insurance to make up the difference.

The amount of long-term disability you may receive through your employer's group plan or your personal insurance benefits may be reduced by the amount of Social Security or other government benefits that may be paid.

A special note for employers

If you are your own employer, consider a group policy for you and your employees. If you are a sole practitioner, or if you work for a business that does not provide benefits under a group policy, an individual policy is a good idea. After all, if you do not receive benefits, your entire business may suffer.

An agent can be helpful
Whether you are an employee or an employer, your insurance agent can help analyze your sources of disability income, determine waiting periods for various benefits, and determine whether additional coverage would be wise.

What Should You Look For In A Disability Policy?

If you find that you need an individual disability policy over and above any other income protection you may have, here's what you need to know:

Definition of disability
Policies vary. Some pay benefits if you are unable to perform the duties of your customary occupation, others only if you can engage in no gainful employment at all. Be sure to ask your insurance agent how various policies define disability.

Extent of disability
Some older policies require that you be totally disabled before payments begin. Partial disability sometimes is covered for a limited time but most often only if the partial disability follows a period of total disability for the same cause. Some policies may not require total disability before partial disability payment.

"Residual" benefits
If you are able to work but your income is reduced because you cannot fulfill all of your job responsibilities, residual benefits can help to make up the difference in your income. A standard feature in some policies (added with a rider to others), a residual benefit allows partial payment based on your loss of income without prior total disability.

Presumptive disability
Even if you can still perform some or all of your regular job, you are presumed fully disabled and are entitled to full benefits under specified conditions. Those conditions typically include loss of sight, speech, hearing, or use of limbs.

Size of benefits
Monthly benefits are calculated in terms of stable, earned income at the time of purchase. Most insurers, not wanting to provide benefits so sizable that they would encourage workers to remain at home, limit benefits from all sources to no more than 70 to 80 percent of monthly income. Lower-paid workers can expect to receive more of their predisability incomes while higher-paid workers generally receive less.

When the payments begin
Today's policies allow you to decide when benefit payments begin. You can choose a waiting period at the time of application; these range anywhere from the 31st day to six months or more after the onset of the disability. Depending on how much money you have saved, and your other resources, you can reduce your premiums by electing to wait 60 days, 90 days, or even six months before you start to receive benefit payments. Remember, though, that the first check is usually not paid until 30 days after the waiting period.

Length of coverage
By choosing a benefit term, you will elect benefits that are payable for one year, two years, five years, to age 65, or for a lifetime. Since disability benefits are designed to replace earned income, most people do not need benefits extending beyond the working years. Electing shorter benefit periods can save premium dollars, but bear in mind that if you need this insurance at all, you probably need it most to cover a disability that permanently removes you from the work force. A lengthy disability threatens your financial security much more than a short term disability.

Keeping pace with inflation
For an additional premium, you can add a cost-of-living adjustment (COLA) to basic disability income coverage. This provision increases benefit payouts by a specified percentage, generally 4 to 10 percent, after each year of disability and can be important particularly during a lengthy period of total disability. While this is a relatively expensive option, it could be vital to maintaining your standard of living.

Most policies include a waiver of premium provision, so that you don't have to pay any more premiums after you're disabled for 90 days. Some policies offer the opportunity to buy additional disability coverage to keep pace with a rising income, without having to pass a medical examination or to submit further medical evidence of insurability.

What Kind Of Business Protection Is Available In The Event Of Disability?

Income replacement insurance is particularly important if you own a small business. In addition to standard disability policies, some polices have such special features as:

• Recovery benefits that pay after you return to work full time, during the period in which you are reestablishing a customer or client base.
• Overhead expense coverage that pays for certain office expenses, over and above the disability benefits that replace personal income.
• For jointly owned businesses, a disability buy-out policy disburses funds for one partner, or the business entity, to buy a disabled partner's share of the business.
• Key-person insurance, which protects a firm against the loss of income resulting from the disability of a key employee.

What Insurance Do You Need?

Many people who thoughtfully protect their families against the loss of income from a breadwinner's death fail to think about what would happen if that breadwinner were unable to earn a living because of a disability. In fact, long-term disability may worsen a family's financial situation more than a wage earner's death because income stops, but expenses continue.

Consider Bob and Ann Jackson. Bob and Ann, who live in a Midwestern city, are parents of a 6-year-old girl. Bob, 31, earns $32,000 selling computers. His monthly take-home pay is $1,994. After staying home several years to care for their daughter, Ann is now a part-time saleswoman in a local boutique. She brings home $338 a month.

Life is uneventful for the Jacksons, until Bob becomes so ill that he can no longer work. Suddenly there is a dramatic reduction inn the Jacksons' income. Because they live in a rental apartment, they have no mortgage disability insurance to cover basic housing costs. Bob isn't eligible for Social Security disability. (To be eligible, Bob would have to demonstrate that he is unable to engage in any gainful work that exists in the national economy, regardless of whether such a job exists in the area in which he and Ann live.) Bob has no prior military or civil service that might qualify him for other government disability programs. He does not qualify for workers' compensation benefits because his illness is not job-related.

The specifics of what happens next depend greatly on whether or not Bob's employer offers group disability benefits, whether these benefits are short term (STD) or long-term (LTD), whether the policy includes a cost-of-living adjustment, and how the group policy defines disability.

If Bob's employer does provide Group LTD, Bob would be entitled to benefits under his employer's policy--probably 60 percent of his gross salary, or $1,600 a month. Of this amount, he would have to pay $193 in federal income taxes and $100 in state income taxes. To continue his family's group medical policy, he will have to pay the portion of his health insurance premium that was previously paid by his employer. Under this scenario, the Jacksons' monthly income (including Ann's current salary) would be almost 30 percent less than their former income. Will this be adequate or not? The Jacksons may save money with Bob staying at home (he is no longer commuting to work, for example), and Ann may adjust to the situation by becoming the principal wage earner. Thus, the employer-provided group disability policy may well be enough.

However, not all employers provide disability benefits. What if Bob is employed by a small firm that has no group disability benefits at all? Or what if the Jackson's situation is such that they need more than they would get under the group policy? Under such circumstances, an individual disability income insurance policy might be just the right answer.
How Do You Find Out If You Have Enough Protection?

First, find out exactly what benefits your employer offers in the event of a disabling illness or injury. Most employers allow some short-term sick leave, which might last from a few days to as much as six months, depending both on employer policy and on duration of employment. In some states (for example, Hawaii, New Jersey, New York, and Rhode Island), state law requires most employers to provide disability benefits for up to 26 weeks. In California, most employers must provide coverage for up to 52 weeks.

No laws require employers to offer long-term disability (LTD) insurance but it is estimated that almost half of mid-size to large employers provide long-term benefits for at least five years. Typical group long-term disability benefits replace about 60 percent of salary, start when short-term benefits are exhausted, and continue anywhere from five years to life. Often, group long-term insurance is fully paid for by employers without contributions by employees. (That's why employer-paid disability income benefits are subject to income tax.)

Check with your employer's benefits office to see if you are covered and, if so, what is available to you. Find out how long you must wait before benefits begin and how long payments will continue during your disability. Find out, too, whether your employer's plan takes other disability coverage (such as government programs) into account when calculating your long-term disability pay. Ask for a booklet describing the disability coverage your company offers.