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Disability income insurance a key component of a financial plan

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Joseph H. Deacon III Joseph H. Deacon III

Joseph H. Deacon III is a partner and independent insurance agent at Charleston-based Deacon & Deacon Insurance Agency. He can be reached at Joseph@DeaconandDeacon.com.

Disability Income Insurance is a very important yet often overlooked and misunderstood foundation component of any professional or business owner's financial house. If you are working for a living and producing an income, chances are you should own some form of long-term disability insurance. 

The month of May has been designated "Disability Insurance Awareness Month" by the LIFE Foundation, a not-for-profit organization designed to educate the public about the importance of protecting your most important asset – your ability to earn a paycheck.

As a professional, entrepreneur or business owner, you are often faced with daunting financial questions. Undoubtedly, one of the key questions is: If you suddenly found yourself seriously ill or injured and you could not work, how would you pay for your bills and the rest of life's necessities?

Understand What You Have

Many people incorrectly assume they are completely covered by Social Security, workers' compensation or a form of employer-sponsored group LTD coverage. While these programs can provide some benefits, they can be limited in scope and may potentially raise tax implications that may further hinder your business. With these programs, barriers to obtaining benefits and the time it may take to qualify for them while your business suffers make it imperative for professionals to consider owning personal disability insurance coverage.

If you have coverage through work, make sure that you understand how it works. Talk with your independent agent who wrote the coverage and ask him to review it with you. Any professional agent will offer this service to you at any time if you ask for it. If you are a professional, business owner or high-income earner, you may discover the policy will only cover a fraction of your income that may not be enough to support your lifestyle or that the benefits may be taxable in the event of a claim.

Once you understand your provided coverage and find it is not enough to maintain your lifestyle, at that point it is time to look into your options to supplement or even replace the coverage. Work with an agent who does business with many carriers and consider only highly rated, well-known insurers such as The Guardian/Berkshire, Mass Mutual Financial Group, Northwestern Mutual, Principal Financial Group, Met Life, The Standard, Union Central, UNUM and Mutual of Omaha. Working with an agent is a free service; policies' prices are regulated by states, and there is no difference in price whether you purchase from an agent or direct from a carrier. Working with a professional agent also gives you the advantage of being able to compare myriad options on the market as well as personal assistance in the event of a claim.

Partial Coverage

Many disabilities are not total in nature, so ask to see policy provisions such as partial disability and residual disability. Many top carriers will begin paying when you have a loss of earning of 15 to 20 percent and may pay as much as 100 percent of the disability benefit during this time. Also look for a contract that will pay partial disability benefits when you return to work from a full disability that are payable to age 65.

Another important provision for many specialized professionals is the ability to receive disability benefits while engaging in another occupation. This is referred to as "True Own Occupation" coverage. 

For example, suppose you are an orthopedic surgeon and derive most of your income from performing surgeries. One day you wake up and have a pain or tremor in your hand, which leads to a diagnosis that leaves you unable to perform surgery, hence eliminating a major part of your practice as well as a large percentage of your income. 

"True Own Occupation" language in the contract will allow you to receive disability benefits while you are engaging in another occupation, such as general practice or hospitalist or teaching at a medical school. If your occupation is specialized, you may want to consider a contract with this type of benefit.

Adding Coverage

Other important benefits to consider include future increase purchase options, which give you the ability to add to your coverage as your income increases without having to prove that you are still healthy. Cost of living adjustments are also important to consider, and it is also important to understand how mental health and nervous system disorders claims are handled, as this can vary greatly depending on the contract. For young professionals, medical residents and law school students, there are also special programs that can offer discounts to help you protect your future income early in your career and lock in low rates. Multi-life discounts of generally 10 to 30 percent, in addition to unisex rates (which can lower premium costs) are also available from many carriers if multiple employees of a business apply and are approved for coverage. Women, in particular, benefit from multi-life's unisex rates. If a female purchases disability insurance on her own, her rate will be higher than a male's. This is not the case with a multi-life policy.

To get the best disability coverage, you need to consider three things:

  • First, look for a policy with solid contractual provisions and language, not the lowest premium. This is not a type of insurance to skimp on quality. 
  • Second, work with a professional who is experienced in the field of underwriting disability insurance, not an agent who dabbles and writes an occasional LTD policy or who only represents one carrier. 
  • Finally, after consulting with your independent agent, take the offer that the underwriter provides and see what you can do to improve it over time. Undertake these considerations for peace of mind that you have found the strongest and most effective protection for your most important asset — your income.