Monday, September 10, 2012

Insurance Part 5: Disability

Part 5: Disability

By Keith Bunn Jr.
September 10, 2012

Have you ever had to file for either short term or long term disability? Chances are you have. In fact, you have a 1 out of 3 chance of being disabled 6 months or longer. And if you’re over 30 years old, you have a greater chance of becoming disabled than dying by the age of 65. Unlike Life Insurance, disability insurance is based on the type of work you do rather than your age or health. If you work with machinery, your disability insurance will be more expensive than for someone who works in an office because you have a greater chance of becoming disabled. So having disability insurance is a big deal!

What should you look for in a disability policy?

1.    Occupational or “Own Occ”: You want to have a disability policy that will pay you if you are no longer able to do the job you were trained to do. Those types of policies are called Occupational or “Own Occ” policies. For example, as most of you know, my primary job right now is that I’m a C.N.C. operator for a local manufacturing company. A few years ago I tore my meniscus in my left knee while playing racquetball and had to have surgery to fix it. After surgery, there was really no way I could do my job. So I was paid for being temporally disabled.

2.    Beware of Policies… :  Beware of short term policies that cover less than 5 years. 5 years or longer is Long Term Disability. 5 years or less is Short Term Disability. Some experts say that Short Term Disability policies are a gimmick and should not be bought. I partially disagree with that. I think if you are just starting this whole get out of debt plan and you are at the beginning of the Baby Steps, and you don’t have your 3 to 6 months’ worth of expenses (Baby Step 3)  saved up yet, you need some sort of Short Term Disability policy in place just in case something happens. But as soon as Baby Step 3 is in place, I would drop Short Term Disability as soon as you’re able to. I will explain why in a bit.

3.    65% of your Income: You want to look for a policy that will pay 65% of you current income. And you want to buy it with after tax dollars, NOT pretax dollars. The reason is, if you buy your policy with pretax dollars, your disability income is then taxable, but if you buy it with after tax dollars, your disability income is then tax free. And you can then live off of 65% of you earlier income.

How do you make disability insurance more affordable?

Over the past few years, “Own Occ” rates have greatly increased. So what can you do to make them more affordable for you?

1.    The best way to eliminate the high rates: Is to buy “Own Occ” for 2 years only. Using my knee surgery example above, if I had really messed up my knee or something went wrong during surgery and I was no longer able to do my C.N.C. job forever but I was able to walk. The insurance company would pay me disability for up to 2 years. Once the 2 years was over they would tell me “Get a job”, unless I was permanently disabled and in that case they would continue to pay for my disability.

2.    Increase the Elimination Period: The Elimination Period is the time between when you became disabled and the disability payments start. Let’s say from the time you were disabled to time the disability payments started was 30 days. You would have a 30 day Elimination Period. The Elimination Period is like the deductibles on your car or home. If you increase the amount of time between when you were disabled to the time the disability payments, the lower your rates will become. So if you have a 3 to 6 months emergency fund, you could do 2 things. (1) Drop your short term disability policy and use your emergency fund to fund your short term disability. This eliminates a premium you were paying. (2) If you increase your Elimination Period to up to 180 days, your rates will decrease.

I hope you have seen a pattern in these blogs so far. It is the BIG events that can cause serious financial harm to you and your family that you need insurance for. The smaller snags that life throws at you and your family are what the emergency fund is for.

I hope my posts inspire you to look at what you’re doing financially and if needed, make some changes that will cause you to win financially. I also look forward to reading your views on any articles or postings that I may post. For more money news, facts and ideas follow me on Facebook, or Twitter. Thanks you!

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