Nobody wants to plan for a disability. In our experience, clients are more willing to incorporate life insurance into their financial plan than disability insurance, even though they are much more likely to become disabled during their working life.
Here are a few key differences between these two types of insurance:
- A life insurance benefit is paid to others upon your death; a disability income benefit is paid to you, maintaining your family’s financial well-being during an illness or injury
- Because death is a cut-and-dried certainty, there is no question about when a life insurance benefit will be paid; a disability benefit is paid when you have an injury or illness, insuring against the loss of earned income
- Traditionally, a life insurance death benefit is paid to beneficiaries in a lump sum; a disability policy usually pays a monthly income to the policyholder up until age 65.
- Many life insurance policies now offer chronic or terminal illness riders, allowing policy owners to draw down part of the death benefit while alive; many disability policies provide riders that offer a lump sum payment in addition to the monthly income benefit when you are ill or injured
- In the private marketplace, both life and disability insurance policies can provide tax-free benefits
- Obtaining life insurance involves an application and a para-medical exam; obtaining disability insurance involves that plus verification of earned income.
A long-term disability is often more financially devastating to a family than a death. Statistically speaking, the younger you are, the more likely you are to suffer from a major injury or illness during your life.
One of the most important things to understand about disability insurance is that you can receive an income benefit due to an injury or illness and still continue to work, earning an income. This is possible when the definition of disability is you can no longer perform your “own” or “regular” occupation. Let me illustrate:
Imagine you are a surgeon who loses a couple of fingers in a freak accident. You may no longer be able to do your job in the operating room. Perhaps you are a civil engineer who contracts a debilitating disease that prevents you from working on a construction site. Both of these scenarios may prevent you from performing your “own” occupation, though you may still be able to work in your field under a different capacity. Or you decide to go into a different field. The point is, you may be able to double dip here – if you’re that surgeon who lost some digits, you can join a private practice and still receive disability income. Again, pay attention to disability definitions.
Besides an “own” occupation policy, another definition for disability is “any” occupation. This definition is less strong. An “any” occupation policy will pay when you can no longer perform the functions and duties of the occupation for which you are suited by reason of education, training, and experience. Continuing with the surgeon example, a policy likely won’t pay if the surgeon moves to a private practice. It may pay a benefit if he goes into an unrelated field.
Who should buy disability coverage?
The answer: Anyone who has a loved one who depends upon you for a living. The reasoning is similar to why you should own a life insurance policy. However, as we’ve discussed, an injury or illness is much more likely than an untimely death.
Disability insurance is especially important for professionals who have recently completed an expensive education. Physicians and Attorneys come to mind. Perhaps you’ve been working a few years out of medical school, or you’re out of residency, and you’re beginning to realize a return on your investment. You have a lot of debt. Your biggest asset at this point is your education – this is your ticket to earning your living. An injury or illness at this point would be financially and emotionally devastating for you and your family. This is why you buy a disability policy. If you insure your life, your car, and your health, why wouldn’t you insure your living?
There are a few other important rider choices to make before purchasing a disability policy. A “Residual Disability” rider can pay if you’re partially disabled and working only part-time. A cost-of-living adjustment (COLA) rider takes into account future inflation. A Guaranteed Insurability Option allows for benefit increases through the years with only financial underwriting – not physical. Also please note that, typically, a policy will cover up to 60% of your income. In earlier years it may cover 100% of income if, for example, you are a resident physician and are expected to make a higher income in a few years.
By all means, seek out professional advice before purchasing this critical, but complicated, insurance policy.
Jonathan Cameron, CFP® is an Investment Adviser Representative of CameronDowning. To discuss whether disability insurance is appropriate for you, visit us at CameronDowning. We’re always happy to discuss general questions over the phone or in person.
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