Worst-case scenario: No disability insurance

Home : Life Insurance : Worst-case scenario: No disability insurance

Email to a friend |

Print this |

PDF version

See your advertisement here

Worst-case scenario: No disability insurance

by Chicago Tribune - Jul 14,2007

Is your retirement savings plan based on a best-case career scenario, with lots of big contributions in those final working years?

If so, you could be setting yourself up for disaster by not planning for what happens if you become disabled and can't work.

A lot of workers assume their income will keep notching up over time, that they'll never take a pay cut. And they often don't factor in a long-term illness or disability.

In a January nationwide telephone survey of 647 adults, 44 percent told the National Association of Insurance Commissioners that they had long-term disability coverage. Of those, nearly three quarters�"71 percent�"said their coverage came from their employer. In other words, most people aren't covered, and the ones who are could lose that coverage if they move to an employer who doesn't offer it.

"We all have a bit of the risk-taker in us," said Sandy Praeger, president-elect of the NAIC and insurance commissioner for the State of Kansas. "We think bad things won't happen to us and that we're invincible."

Unfortunately, we're not. Illness can not only derail your current financial situation, it can create upheaval in retirement plans by sometimes advancing your retirement date before your plan or by creating a block of time when long-term saving just isn't possible.

Older workers who launch businesses or work part time as a second career after "retirement" often lose the inexpensive group disability coverage through their long-time employers. And it happens just as private insurance becomes more expensive because they have to go through an underwriting process to obtain private coverage.

"People in their 50s are far more likely to be disabled than die, so it makes sense to keep some coverage" even after children have left the nest and you're winding down your career, said Alice Magos, a small-business analyst with CCH Inc., a tax and benefits publishing firm in Riverwoods.

So, how much coverage is reasonable, and what should you look for in a private long-term disability policy, which typically covers disabilities lasting longer than six months?

Most policies pay a maximum of between 60 percent and 80 percent of your previous income, but as long as you paid the insurance premiums, that is tax-free money, so it is close to fully replacing your income, depending on your tax bracket.

Could you get by on less? Probably not, experts said. Any savings in expenses because you are no longer working often are eaten up by extra costs associated with the disability.

CCH offers a detailed calculator that will help you determine how much coverage you need at www.finance.cch.com/sohoApplets/Disability.asp.

A 45-year-old male might expect to pay between $1,100 and $4,800 per year on disability insurance premiums, depending on the policy type. The annual average is $2,300, according to a spokeswoman for UnumProvident, a large provider of the insurance.

When shopping for a policy, look for providers rated highly by the large rating agencies such as A.M. Best Co. ( www.ambest.com or 908-439-2200). Experts said to choose a non-cancelable policy, which means the premiums cannot be raised as long as you pay them. With guaranteed renewable policies, providers can raise premium prices for entire occupational classes.

What about tapping Social Security disability insurance? That's possible, but it has more limitations than a private policy, experts said.

Particularly for higher-income workers, Social Security won't be enough to replace your income, said Ron Buerges, chief operating officer for Allsup Inc., a Belleville company that helps individuals obtain Social Security disability insurance benefits.

For 50-plus workers, Buerges recommends purchasing a private, non-cancelable policy while you are still healthy and working at your main career. That may save you from the underwriting process when you are a little older, and keep your benefit level higher, he said.

Of course, that could mean duplicating policies if you have coverage through work, which can be costly, and you will need to check the fine print on the policy to see exactly what income payment is guaranteed, experts said. For example, if you are an executive making $100,000, then leave your company to become a $40,000-a-year consultant, your individual policy may only guarantee to pay a percentage of your average salary for the last year.

Have a retirement question? Write to yourmoney@tribune.com, or via mail at Your Money, Chicago Tribune, Room 400, 435 N. Michigan Ave., Chicago, IL 60611. If your letter is selected, we may include you and your question in a future column.

For more information
•The Consumer Federation of America offers a brochure on the basic types and policy features at www.consumerfed.org/pdfs/ltdbrochure.pdf.

•In addition, the National Association of Insurance Commissioners offers more consumer tips at www.insureuonline.org.

www.termlifeexpress.com